Here is a trivia question: What manufacturing based industry has one-quarter of the DSO (days sales outstanding) the auto industry has?
Need another hint?
This industry builds gigantic machines that fly in the sky.
Okay, easy enough, it is the aerospace and defense industry.
The largest company by market capitalization is Boeing (NYSE: BA). The company operates divisions in commercial jetliners, satellites, human space flight and of course military equipment. Other companies of comparison in the business today, from largest to smallest in market cap; Lockheed Martin Corp (NYSE: LMT), Northrop Grumman (NYSE: NOC) and Rockwell Collins (NYSE: COL). These companies represent the majority of production in aerospace and defense equipment. Raytheon (NYSE: RTN) and General Dynamics Corporation (NYSE: GD) are two others worthy of mention. The aerospace industry is more than aircraft. A diversification into commercial aircraft, communications gear and consulting add revenue streams beyond government contracts for virtually all of these companies.
Boeing closed an acquisition of CDM Technologies (software engineering) on December 7. Boeing Defense, Space & Security announced the support and growth Boeing will receive in the logistics command and control business division from CDM in a press release. Well publicized delays with the company’s 787 aircraft have hampered the stock price. The current dividend yield of 2.55% is paying stockholders to wait. The stock is off its 52-week high of $76.00 reached in April, but off the lows of last December.
Lockheed Martin is also an acquisition machine by comparison. In the four business segments Lockheed operates, three companies were added in the past year. Companies of this size often rely on acquisitions to grow. Boeing’s 2.55% dividend yield looks downright paltry compared to Lockheed’s 4.32% yield at the time of this writing. Based on fundamentals, several of the companies in this sector outperform Boeing. The aerospace giant has come back before and is poised to do it again.
Boeing the stock has been beat up. The company has proven to be resilient to Wall Street reactions in the past. The sales growth in the trailing twelve months (ttm) has surpassed 4%. The company’s strongest financial fundamental is ROE. With a return on equity of 200%, there is no one that reinvests earnings more effectively. Gross margins lag several members in the industry at 19.42%. The operating and profit margins are what really count in business. Boeing controls operating margin expenses better than nearly three-quarters of the industry.
Boeing will continue to be a volatile stock on earnings releases with a debt/equity ratio of nearly 2.8 times. The company is subject to headline risk and production delays, so are the competition. They may also benefit from headlines if tensions between North Korea and South Korea intensify. Moving forward in the recovery of the worldwide economy will prove profitable for Boeing. It is difficult to overlook a company trading 14 times earnings with a high ROE.