The Boeing Company (BA) is the world’s leading airplane manufacturer. The company is also a leader in communication systems, defense aircraft and systems, and space technology. Diversity is an essential part of Boeing’s mission and goals. Chicago, Illinois-based company operates through five segments: Commercial airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital Corporation. The company provides products and support services to customers in 150 countries with more than 165,000 talented employees.
As of August 31th, Boeing stock was trading at $66 with a 52-week range of $56.01– $80.65. It has a market cap of $50.2 billion. Trailing twelve month P/E ratio is 14.2, and forward P/E ratio is 12.9. P/B, P/S, and P/CF ratios stand at 10.6, 0.8, and 14, respectively. The 3-year annualized revenue and EPS growth stand at -1.1% and -5.4%, respectively. Operating margin is 7.7%, and net profit margin is 5.4%. The company has a debt-to-equity ratio of 2.2. Boeing has a yield of 2.51% for its shareholders.
Boeing has a 3-star rating from Morningstar. While its trailing P/E ratio is 14.2, it has a 5-year average P/E ratio of 20.6. Out of 28 analysts covering the company, 19 have buy, one has outperform, 7 have hold, and one has underperform ratings. Wall Street has diverse opinions on Boeing’s future. The bottom line is 14% growth, whereas the top-line growth estimate is 40.1% for the next year. Average five-year annualized growth forecast estimate is 12.2%.
What is the fair value of Boeing given the forecast estimates? In this article, the 16th in a never-ending series, I will show a step-by-step calculation of Boeing’s fair value using discounted earnings plus equity model.
Discounted Earnings Plus Equity Model
This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:
V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5 + Disposal Value
V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]
The earnings after the last period act as a perpetuity that creates regular earnings:
Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r
While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.
Boeing’s Valuation
Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate.
Since we are in the middle of the year, it will be more feasible to take the average of ttm EPS of $4.72 along with the mean estimate of $5.23 for the next year.
E0 = EPS = ($4.72 + $5.23) / 2 = $4.975
Wall Street holds diversified opinions on Boeing’s future. While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 12.2%. Book value per share is $6.39.
The rest is as follows:
| Fair Value Estimator | ||
| V0 | E0 | $4.98 |
| V1 | E0 (1+g)/(1+r) | $5.03 |
| V2 | E0((1+g)/(1+r))2 | $5.08 |
| V3 | E0((1+g)/(1+r))3 | $5.14 |
| V4 | E0((1+g)/(1+r))4 | $5.19 |
| V5 | E0((1+g)/(1+r))5 | $5.25 |
| D | E0(1+g)5/[r(1+r)5] | $47.73 |
| BV | Equals | $6.39 |
| Fair Value Range | Lower Boundary | $78.39 |
| Upper Boundary | $84.78 | |
| Potential | 28.46% | |
I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my 5 year discounted-earnings-plus-book-value model, the fair-value range for Boeing is between $78.39 and $84.78 per share.
As of Aug 31th, Boeing was trading at a price of $66. I like Boeing as a company. The company reaches new heights every day. I see great growth potential, as well. The market has under-priced Boeing’s growth potential. The current price of $66 indicates the stock is undervalued. Based on my FED+ fair value estimate, Boeing is 18% cheaper than the lower boundary of my fair-value range. The stock has 28% upside potential to reach the upper boundary of its fair value range.
O – Metrix Confirmation
If the math above looks too complicated for you, try estimating the fair value using the O-Metrix as such:
O-Metrix = [(Dividend Yield + Growth Estimate) / (P/E Ratio)] * 5
- Dividend Yield: Higher is better.
- EPS Growth: Higher is better.
- P/E Ratio: Lower is better.
The back-testing of this valuation technique on 40 large-caps shows that O-Metrix works very well over the long-term, such as five years. I am also continuously checking on specific sectors, and the formula works very well so far.
What is the O-Metrix Score?
- Boeing has a yield of 2.51%. Therefore, the yield is 2.51.
- Growth estimate is the same as the discounted earnings model and is equal to 12.2%.
- Since we are at the middle of the year, taking the average of ttm (14.2) and forward (12.9) P/E ratios will smooth the results. Thus, the average P/E ratio to be used in the model is 13.55.
O-Metrix = [(12.2 + 2.51) / (13.55] * 5 = 5.43
Depending on the benchmark chosen, the market has an O-Metrix score range between 4 and 5. Boeing's O-Metrix score of 5.43 is in the higher-than-average fair-value range. Back-testing of this ranking system shows that companies with higher-than-average O-Metrix scores beat the market with lower volatility. At a price of $66, the company is trading within the C-Grade, upper end of average-return zone.
Summary
Boeing’s stock has always been priced at a premium due to its high growth potential. The average P/E ratio in the last 5 years was 20.6. It is trading with a low P/E ratio of 14.2, and forward P/E ratio of 12.9. With a profit margin of 5.44%, Boeing offered 2.51% dividend yield last year. In the last 5 years annualized EPS growth was 6.87%. With an ever increasing demand for air transportation, I expect the growth to keep its pace.
As of Aug 31, Boeing was trading at $66, lower than my fair-value range of $78.39 and $84.78. Its ttm return on equity of 90.4% is well-above the market. The stock has slightly high total debt/equity ratio of 2.2 and Beta of 1.28. The stock has 28.46% upside potential based on 12.2% EPS growth estimate. I would prefer this stock. It pays substantial dividends and priced with a low P/E ratio. I think the current price offers a suitable entry point.
You can download FED+ Fair Value Estimator, here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
