Solid stock market investing consists of comparative valuation to a large degree. There are thousands of equities to choose from in the market. The ability to size up individual equities both against others in the same sector as well as the overall market is a critical skill to becoming a long-term successful investor.
Take the case of Boeing (NYSE:BA) and General Electric (NYSE:GE), both of which I have in my portfolio. Both are American manufacturing icons that are riding the long-term secular demand coming from the developing world such as China and India for big ticket items like airplanes, jet engines and large medical devices. Both are sporting similar valuations going for just under 15 times next year's projected earnings and both are primary beneficiaries of the controversial Import - Export bank that is ostensibly set up to help "small business."
I have had General Electric as a core position in my income portfolio for some time as it is a good proxy on the overall S&P 500 but sports a higher dividend yield of 3.3%. However, Boeing now occupies twice as big a position in my current portfolio after continuing to add shares during the stock's recent decline. There are several reasons why I like Boeing here better in the near and medium term even as I continue to hold both stocks in my portfolio.
Even though GE has a higher dividend yield than Boeing, it lacks the growth drivers the aerospace giant is currently experiencing. General Electric is struggling to achieve even two percent revenue growth right now and earnings should barely budge this year before rising just over 5% next year according to the current consensus. Boeing in contrast, thanks mainly the huge success of its new Dreamliner, is seeing revenue growth of around 4% despite defense cutbacks which should power better than 10% earnings growth in both 2014 and 2015. The clear winner via this metric is Boeing.
During its last reported quarter Boeing delivered earnings of $2.42, over 40 cents a share above the consensus. The company also raised full year guidance to $7.90 to $8.10 a share, from its earlier view of $7.15 to $7.35. This was a ~$400 million charge due to some cost overruns at its military division that I believe investors overreacted to by driving down the stock price despite the earnings beat and upward guidance.
General Electric has done a marvelous job over the past few years by becoming more focused on its industrial businesses by spinning or selling off a lot of its non-core financial assets. It will soon spin off its U.S. consumer finance business. However, most of the low hanging fruit has been picked and the company needs some new catalysts. Dividend growth which has been stellar since emerging from the financial crisis should now slow significantly unless the company can find a way to grow earnings at a faster rate. Again the winner here is Boeing.
One of the major things I like right now about Boeing is its simplicity. Its main growth driver for this year and many coming years is going to be delivering on the huge order backlog for its new Dreamliner. The longer the production run lasts the more efficient the manufacturing process should become, boosting margins over the long term.
General Electric, even after a commendable job of lowering its exposure to the financial sector, still has a lot of moving parts. It is in jet engines, locomotives, big ticket medical devices and still gets a good portion of revenue and profits from its financing businesses. It is also trying to significantly grow its exposure to energy services. This is a lot to manage as it is in any conglomerate. Boeing is the simpler business to understand.
I find these valuation exercises useful in making new investment decisions as well as weighting individual stocks within my current portfolio. I like both these huge American industrials over the long term, but the pick here is Boeing at the moment for the additional weighting.
Disclosure: The author is long BA, GE. 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.