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The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.

The three methods used in this analysis are:

  1. Price to Owners Earnings (OE) = Current and future analysis
  2. Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
  3. Statistical Indicator Analysis (SIA) = Historical price action

For those new to this analysis please link here for an introduction: OE and COE, SIA, CapFlow.

The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for five years (provided that no macro-economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every five years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher.

Analysis of Boeing (BA)

Sometimes great companies make mistakes and announce new and improved products before they are ready, which in turn tarnishes their reputation and hurts the performance of the stock. This happened with the introduction of “New Coke” by Coca-Cola (KO) and with Microsoft’s (MSFT) launch of its Vista operating system. The new poster boy for this illustrious group is Boeing and its problem child is the Dreamliner. I could go on for hours explaining what has gone wrong, but instead I will just link you to the best-written article on the subject, that I have read so far, found here.

The Dreamliner has been the farthest thing from a dream for Boeing that you can imagine, and in trying to reduce costs Boeing has outsourced production of most of the components that go into the plane. The company for decades controlled the entire process, from design to construction, in-house. By trying to save money, its mistake was that it outsourced everything all at once, instead of first testing out a small subset, to see what the results would have been.

Regardless of all these problems and mistakes, Boeing is still a duopoly, and along with Airbus controls most of the production market for airplanes. And just as happened with Microsoft and Coca-Cola (who also had complete dominance of their markets), Boeing should not be hurt that badly from these missteps once the first plane is finally delivered. Boeing's manufacturing of its other fleets is still very profitable, and it continues to be a major force in the defense industry. In fact, once it straightens out its outside component/supplier problems, it will indeed save a ton in capital expenditures. So let’s investigate Boeing using our system and see how it does.

The following is a table housing Boeing’s Owners Earnings data from 1973-2010 (including estimates):

[Click charts to expand]

As you can see from the table above, Boeing has been free cash flow positive for all the years under analysis, except in 1989. This has allowed it to generate some $55 of owners' earnings per share from 1973 to 2010. What is really impressive is that it has been able to keep its CapFlow under 50% for many of those years and did a great job, especially from 1999 onward. Capital Expenditures are a big problem for industrials, and now by farming out the production of its components, Boeing is expected to have record low CapFlows going forward.

Free cash flow should also spike as these new Dreamliners sell for about $175-200 million, and I believe that Boeing at last count had 800 orders in place. With innovation comes greater cash flows and (if at the same time it fixes its component/supplier problems) lower capital expenditures. It’s a perfect scenario, but not until it delivers its first plane. You can’t make money if the inventory is in the back room. Only when it gets out onto the selling floor and used do you make money.

Here is Boeing’s CapFlow and Cumulative Owners Earnings charts:

Now it’s time to get our Price to Owners Earnings (P/OE) and Cumulative Owners Earnings (COE) sell prices so we can get a more complete picture of the real value of Boeing. I will use Boeing’s 2010 estimated OE for our analysis. In 2010 the OE for Boeing is expected to come in at $5.10. So since our sell number for (P/OE) is 30, we therefore multiply 30 X $5.10 and get a sell price for (P/OE) of $153. Our 2010E COE is $55.75, and we like to sell at 2.0 times our COE, so we get a sell price of $111.50. Finally, to complete the analysis, we need to get its SIA for 2010. Here is the SIA chart for Boeing:

Our current SIA for BA is $47.92 so at 2.0 x $47.92 we get a sell price for SIA of $95.84. Looking at the chart, you will notice that SIA could have made you a lot of money in the past, and back on #6696 (February 2, 2003) you would have been able to buy BA at a discount to its SIA for four months -- and then would have seen the stock go up 300% in the next four years and peak out on #7868 (October 1, 2007). On that day, it was trading at 2.48 times its SIA and proceeded to fall from $97.51 to $27.88 for a drop of -71% by March 3, 2009. At $27.88, Boeing was trading at 37% percent discount to its SIA of $43.95.

So for BA we now have three separate sell prices:

  1. P/OE = $153 (30 times OE per Share)
  2. COE = $111.50 (2 times COE)
  3. SIA = $95.84 (2 times SIA)

Total = $360.34/3 = $120.11 = Sell Price

Buy Price = $60.06

Conclusion = BA is a very strong hold, bordering on a weak buy

Disclosure: Long MSFT, no position in BA, KO.

Source: Boeing: Free Cash Flow Analysis