Seeking Alpha
Long/short equity, value, growth, dividend investing
Profile| Send Message|
( followers)

Summary

  • In the latest instalment of our Head-To-Head series, we pitch two companies from the aerospace sector, Boeing and Lockheed Martin, against one another.
  • The article focuses on the relative strengths and weaknesses of Boeing and Lockheed Martin based on business performance and sustainability/dividends.
  • It concludes by discussing the current valuations of the two companies, and answers whether Boeing represents good relative value at current price levels.

Boeing Background

Boeing (NYSE:BA) was founded in 1916 and is based in Chicago, Illinois. The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network and Space Systems, Global Services and Support, and Boeing Capital. The Commercial Airplanes segment develops, produces and markets commercial jet aircraft for various passenger and cargo requirements. The Boeing Military Aircraft segment is involved in the research, development, production and modification of manned and unmanned military aircraft and weapons. The Network and Space Systems segment is engaged in the research, development, production and modification of electronics and information solutions, strategic missile and defense systems. The Global Services and Support segment offers a range of products and services comprising of integrated logistics, including supply chain management and engineering support. The Boeing Capital segment facilitates, arranges, structures and provides financing solutions.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.

We score each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

  1. Return on equity
  2. Return on assets
  3. Operating margins
  4. Quarterly revenue growth
  5. Quarterly earnings growth

Sustainability/Dividends

  1. Debt to equity ratio
  2. Interest cover
  3. Dividend payout ratio
  4. Forward yield
  5. 5=year average yield

Once we have scores for the two buckets, we can then assess whether a company represents good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.

Valuation

  1. Forward price to earnings ratio
  2. Price to book value ratio
  3. Enterprise value to EBITDA
  4. Price to sales ratio
  5. 5-year price to earnings growth ratio

So, for example, a company that scores well compared to its rival on the first two buckets (business performance and sustainability/dividends) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below highlights the data that we will use to score Boeing and Lockheed Martin (NYSE:LMT) for the first two buckets.

Stock

Boeing

Lockheed Martin

Business Performance

Return on equity

40.06%

122.34%

Return on assets

4.36%

7.94%

Operating margins

7.20%

10.81%

Quarterly rev. growth

8.30%

-3.80%

Quarterly EPS growth

-12.70%

22.60%

Sustainability/Dividends

Debt to equity ratio

61.06%

128.17%

Interest cover

16.86

16.67

Dividend payout ratio

38.00%

51.00%

Forward dividend yield

2.20%

3.20%

5 year average yield

2.30%

4.20%

We then score each company relative to its peer based on the above data, with points being awarded as follows:

1st place: 10 points

2nd place: 0 points

Below are the scores for Boeing and Lockheed Martin:

Stock

Boeing

Lockheed Martin

Business Performance

Return on equity

0

10

Return on assets

0

10

Operating margins

0

10

Quarterly rev. growth

10

0

Quarterly EPS growth

0

10

Sustainability/Dividends

Debt to equity ratio

10

0

Interest cover

10

0

Dividend payout ratio

10

0

Dividend yield

0

10

5 year average yield

0

10

Total Score

40

60

As you can see, Boeing loses out to Lockheed Martin by a significant amount. Indeed, it was only able to score higher than Lockheed Martin on four of the criteria we use in our first two buckets, those being quarterly revenue growth, the debt to equity ratio, interest coverage and the payout ratio. However, the relatively strong quarterly revenue growth figure does not paint the full picture, since Boeing lost out to Lockheed Martin by a wide margin on the quarterly earnings growth figure. Indeed, Boeing saw a decline in the bottom-line last quarter of 12.70%, while Lockheed Martin posted strong gains of 22.60%. Part of the reason for Boeing's higher revenue and lower earnings numbers last quarter was a non-cash charge for retirement plan changes, so the gap between the two companies on the quarterly earnings metric is unlikely to be so wide going forward, although Lockheed Martin's current rate of increase is likely to be hard for Boeing to beat.

One positive for Boeing is with regard to sustainability, where it beat its sector peer in terms of the debt to equity ratio and also (albeit narrowly) in terms of the interest coverage ratio. This shows that, while Boeing is not as profitable as its rival, it remains a solid business that looks to be relatively sustainable. It benefits, of course, from a civil aviation industry that is in a much stronger state than the military aviation industry, as sequestration continues to take place. Indeed, Boeing recently predicted growth of 5% per annum in passenger numbers over the long-term, which bodes well for the business.

Meanwhile, a forward dividend yield of 2.20% is easily beaten by Lockheed Martin's forward yield of 3.20%. One bright spot with regard to dividends, though, is that Boeing has a low payout ratio compared to Lockheed Martin and so there is scope to improve the level of dividends on a per share basis.

Overall, though, Boeing loses out to Lockheed Martin by a fairly wide margin.

Valuation

So we feel that Boeing has lost out to Lockheed Martin by a significant amount in the first two buckets. Therefore, we would expect Boeing to trade at a substantial discount to its sector peer. Let's see if it does.

Stock

Boeing

Lockheed Martin

Valuation

Forward price to earnings ratio

15.22

13.74

Price to book ratio

6.38

10.36

EV/EBITDA

10.86

9.36

PEG

1.63

1.63

Price to sales ratio

1.05

1.11

While Boeing does appear to be cheaper than Lockheed Martin at current price levels based on the price to book and price to sales ratios, it appears expensive based on the forward P/E ratio and the EV/EBITDA ratio. Indeed, Boeing trades on a forward P/E that is 10.77% higher than that of Lockheed Martin, while its EV/EBITDA ratio is 16.03% higher than that of its rival. This shows that Boeing may be overvalued relative to its rival, since we would expect it to trade on a decent discount to its sector peer on the majority of valuation metrics.

Conclusion

Boeing is a sound company that appears to be highly priced when compared to its aerospace peer, Lockheed Martin. It was comprehensively beaten on our rating system and its only real relative strength was with regard to sustainability. As highlighted in the third bucket (valuation) it also appears to be relatively overvalued at current levels and, as such, we feel it could underperform its sector peer going forward.

Feedback Request: What do you think about Boeing? Would you buy, sell or hold right now? Please comment below.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: This Rival Makes Boeing Look Overpriced