The purpose of this article is to determine a price target range for Boeing (NYSE:BA) using the Gordon Growth Model. The author uses a 4-year period through to 2018 to calculate potential upside from the current price of $127.21. Using the aforementioned model, the author calculates that according to the present value of the firm's future cash flows, Boeing's intrinsic value is $390, representing a 130% upside from the current price on a logarithmic basis, or a 32% annual growth rate.
Gordon Growth Model
The analysis assumes that Boeing has high growth prospects through to 2018.
Boeing's dividend payments are assumed to grow at a constant rate on a perpetual basis.
The required rate of return remains constant over time.
The dividend growth rate is less than the required rate of return.
The author uses a discount rate (required rate of return) of 29.6%, in accordance with the 2013 rate of return on the S&P 500 Index. This is to account for the similarly high (and hence uncertain) assumed growth in dividends per share.
*Retention Rate = (1 - 0.338) = 0.662
*Sustainable Growth Rate = (0.662*43.75%) = 28.96%
The sustainable growth rate, i.e. the rate at which a company can continue to grow dividends and earnings without altering its capital structure, suggests that based on the company's retention rate, Boeing has a high capacity to increase its dividend payments in the future. In accordance with the assumptions of the Gordon Growth Model, the author forecasts an annual dividend growth rate of 28.96%, which is less than the assumed 29.6% discount rate. Note that the assumptions in these rates are rather extreme and theoretical in nature. They do not necessarily reflect the dividend rates Boeing would pay in actuality; the purpose of the Gordon Growth Model in this instance is to value Boeing if it were to pay at its full dividend capacity given the anticipated Sustainable Growth Rate.
Based on the Gordon Growth Model, Boeing's intrinsic value is $390. It is reported that Boeing's Return on Equity of 43.75% is 541.5% higher than all stocks in the Aerospace and Defense sector, and the collective ROE for all stocks is 724.11% lower than the firm. It should be pointed out that the Gordon Growth model is not especially conservative, as it assumes that high growth in dividend payments is sustainable indefinitely. However, given the firm's high return on equity and the ability to maintain a reasonable dividend payout ratio, it is quite possible that Boeing is at the beginning of a high-period growth phase. The calculated return of 32% per annum through to 2018 is consistent with the recent 1-year change of 49.95% according to CNBC. Please note that this figure is not at all conservative and should be regarded as a "best-case scenario". However, if Boeing can continue to grow its dividends and concurrently deliver sustainable earnings, this is definitely a stock to watch.
Additional Disclaimer: Please note that the author is not a professional investment advisor, and any decisions regarding whether to invest should always be made in consultation with such. The research in this article is offered purely on an "as is" basis, and does not constitute a recommendation to buy or sell. While the author has made every effort to verify the material of this article, the accuracy of the same cannot be guaranteed and investors are always responsible for conducting their own due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.