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Summary

  • Company is in the sweet spot of the cycle.
  • Free-cash-flow generation improving, a key metric.
  • Recent dividend and share repo increase a shareholder plus.

Boeing (NYSE:BA), reports their Q1 '14 earnings before the bell on Wednesday morning, April 23rd, 2014, with analyst consensus expecting $1.56 in EPS on $20.2 billion in revenue, for an expected year-over-year decline of 10% in EPS on 7% revenue growth.

BA's stock has corrected in 2014, which is consistent with market action, and after 2013's remarkable 81% capital gain.

Year-to-date, BA's stock is down just 6%, but still trailing the SP 500.

There has been a slight reduction in the Q1 '14 consensus analyst estimates since the January '14 earnings report.

In late December '13, BA announced a 39% increase in the annual dividend, to $2.92 annually per share for 2014, as well as an increase in the share repurchase program.

In early April, BA announced their March and Q1 '14 deliveries of 161 aircraft in the BCA division.

When BA reported Q4 '13 earnings in January '14, management guided to $7.00 - $7.20 in 2014 EPS, with current consensus EPS currently projected at $7.38.

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We are long BA's stock within client accounts since we feel the airplane manufacturer is in the early to middle stages of a long-term product up-cycle, and we also think that the worst of the expectations for Boeing Defense and the none Commercial Airplane segment are already discounted in the stock.

Here is our internal spreadsheet breakdown of BA's business segments:

Revenue segmentation12/31/20139/30/20136/30/20133/31/201312/31/20129/30/20126/30/20123/31/201212/31/20119/30/20116/30/20113/31/201112/31/20109/30/20106/30/20113/31/201012/31/20109/30/20106/30/20103/31/201012/31/2009
Commercial revenues62%63%62%57%63%61%59%57%55%53%53%48%50%51%48%49%51%
* Boeing Military Aircraft19%16%18%22%18%19%21%22%20%22%22%23%22%22%23%21%21%
* Network & Space Systems10%10%9%10%8%10%9%9%10%13%12%16%15%14%15%15%13%
* Global Services & Support9%10%10%11%10%10%11%11%13%11%12%13%13%12%13%13%14%
Boeing Capital Corp revenues1%0%0%1%1%1%0%1%1%1%1%1%1%1%1%1%1%
100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
Operating income by segment
Commercial revenues61%68%65%58%63%57%61%58%53%56%53%42%43%58%47%49%55%
* Boeing Military Aircraft18%9%17%21%17%22%18%23%20%21%22%30%22%18%25%19%19%
* Network & Space Systems9%8%6%7%6%8%6%4%9%9%11%12%15%9%12%13%8%
* Global Services & Support11%11%12%12%15%11%13%12%17%13%12%13%19%13%13%16%18%
Boeing Capital Corp revenues0%3%1%2%-1%2%2%2%0%1%0%3%0%3%4%3%1%
100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%100%
Operating income margin
Commercial revenues10.3%11.6%10.7%11.4%9.0%9.5%10.2%10.0%9.2%11.4%10%7%8%12%9%9%11%
* Boeing Military Aircraft10.0%6.2%9.6%10.5%8.1%11.7%8.8%10.1%9.5%10.0%11%11%9%8%10%8%9%
* Network & Space Systems10.3%8.7%6.7%8.0%6.2%8.1%6.7%4.1%8.6%7.9%10%6%9%6%7%7%6%
* Global Services & Support12.8%11.4%11.8%12.1%13.1%10.7%11.9%10.9%12.6%12.7%11%8%13%11%9%11%14%
Boeing Capital Corp revenues6.0%81.4%18.3%41.9%-17.2%32.7%31.3%26.4%-6.9%15.1%2%18%4%26%34%28%9%
10.4%10.7%10.3%11.1%8.8%10.0%9.9%9.7%9.5%10.8%10%8%9%10%9%9%10%
Revenue growth rates 3/31/201112/31/20109/30/20106/30/20103/31/201012/31/2009
Commercial revenues4%15%15%-2%32%28%34%54%31%9%19%-5%-11%11%-12%-13%100%
* Boeing Military Aircraft6%-6%-6%-5%5%-4%13%27%9%5%2%5%-3%-5%4%6%19%
* Network & Space Systems19%12%9%9%-3%-13%-9%-24%-19%-3%-12%1%2%-14%-24%-13%-17%
* Global Services & Support-4%10%3%-4%-11%5%11%14%21%-4%-4%-8%-13%1%-3%4%19%
Boeing Capital Corp revenues29%-4%5%-16%0%-20%-46%-29%-20%-26%14%8%-12%2%-3%-1%-2%
5%10%9%-2%17%13%20%29%17%4%7%-2%-8%2%-10%-7%40%
Operating income growth rates 12/31/20109/30/20106/30/20103/31/201012/31/2009
Commercial revenues19%40%20%12%29%6%32%114%56%7%35%-25%-39%-136%-16%63%-205%
* Boeing Military Aircraft31%-50%3%-2%-10%12%-6%18%16%27%8%38%-8%-35%-10%-7%1%
* Network & Space Systems97%20%9%114%-31%-10%-36%-49%-22%18%19%-18%55%-40%-30%-16%-38%
* Global Services & Support-6%17%3%6%-7%-11%21%46%17%13%14%-29%-18%44%-22%4%10%
Boeing Capital Corp revenues-145%139%-39%33%150%74%675%3%-233%-58%-93%-30%-57%15%53%24%-26%
24%18%13%12%9%4%16%54%27%10%19%-13%-22%-191%-16%19%-2840%

Boeing Commercial Aircraft (BCA) is anywhere from 60% to 65% of total revenues and operating income, while Boeing Defense, Military and such are the remainder.

In 2013, BA grew EPS 38% and the stock rose over 80%, while in 2014 current EPS consensus is expecting 4% growth, so will the stock follow through on subdued expectations?

Valuation:

Consensus analyst expectations for BA in terms of EPS growth the next three years, i.e. 2014, 2015, and 2016 are fo4 4% 12%, and 11% growth.

Revenue growth for the same three years is expected at 5%, 4% and 2% respectively.

At $126 per share BA is currently trading at 18(x) and 16(x) forward EPS of $7.38 and $8.28, or expected 4% and 12% growth.

Early in 2014 we had the currency devaluation in Argentina, and the Ukraine problems, which may not go away for some time. These could remain lingering issues for most of 2014.

The most compelling metric to BA's 2013 as evidenced by the dividend and share repurchase increase was the improvement in free-cash-flow last year.

BA currently sports a 6% free-cash-flow yield and is trading at 10(x) cash-flow.

Our conclusion/summary for BA is that while Q1 '14 financial results will reflect a slower year of growth for BA, and guidance will likely be conservative, we are long BA for the next 2-3 years, given the global growth in airplane demand. Potential problems would be from unstable emerging markets, volatile currencies, and any uncertainty in the regional hot spots around the world, which curtails business and personal travel.

By Boeing's own projections, demand for air travel is expected to grow 5% per year, (long-term average), so any kind of return to synchronized global growth, will likely help drive additional demand for BA.

Still BA is the ultimate cyclical play: investors have to be wary of the aircraft cycle, and be willing to part with the stock when demand looks the most robust.

Our intrinsic value estimate on BA is between $175 and $200 per share, which means, according to our internal model, the stock is still trading at a 30% discount to intrinsic value. Morningstar assigns an intrinsic value to BA of $120 per share.

As in all things, we think the truth is somewhere in-between.

Technically the stock has consolidated its 2013 run nicely, and while 2014 could be a consolidation year, we are watching the 2015 EPS and revenue estimates for BA. As long as those estimates keep moving higher, we think the stock price can follow.

We would continue to be a buyer of the stock under $120 to $118 or the 50-week moving average, and would reconsider our long position if the July, 2007 high of $107 - $108 is taken out on volume.

Source: Boeing Earnings Preview: Multi-Year, Secular Airplane Cycle Intact