This article is the second of the series in looking at the components of the Dow Jones Industrial Average for possible investment. This segment's stocks are Boeing and Bank of America.
Boeing (BA) – “The Boeing Company, together with its subsidiaries, engages in the design, development, manufacture, sale, and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. The company operates through five segments: Commercial Airplanes, Boeing Military Aircraft (BMA), Network & Space Systems (N&SS), Global Services & Support (GS&S), and Boeing Capital Corporation (BCC)." (Business Description from Yahoo Finance)
- Boeing has easily beat earnings estimates the last four quarters and is selling at just 12 times next year’s projected EPS.
- Long term, Boeing is a great secular play on the fast growth in air travel in the emerging markets.
- Boeing is selling in the bottom half of its five year valuation range based on P/E, P/S, P/B and P/CF.
- BA provides a decent yield of 2.7%, an A rated balance sheet and revenues are projected to grow over 10% next year.
- Credit Suisse has a $94 price target on Boeing and the median analyst target is $86, both significantly above its current price of $62.
- Continued meddling by the NLRB into its site selection for future production
- The impact of declining worldwide growth on new airplane orders
- The need to pare the defense budget will impact Boeing given they are the third largest U.S. military contractor
Prognosis: Boeing sells for a reasonable valuation, but clarity on the direction of worldwide economic growth as well as greater confidence on new product launches (AKA, Dreamliner) are necessary before I would pull the trigger on Boeing. I would revisit this analysis if Boeing gets to its 52 week low or around $55.
Bank of America (BAC) – “Bank of America Corporation, a financial holding company, provides banking and nonbanking financial services and products to individuals, small- and middle-market businesses, large corporations, and governments in the United States and internationally.” (Business Description from Yahoo Finance)
- BAC sells at less than 5 times next year’s projected EPS
- Bank of America sells at less than .4 book value, extraordinary low for a bank even in this environment.
- Warren Buffet’s recent $5B investment is a nice, if expensive vote of confidence. Getting $8B for half of its investment in a large Chinese bank also help its capital level.
- Loan loss provisions should continue to decline significantly barring a new recession
- Credit Suisse’s price target on BAC is $14 or half of Bank of America’s current price. The median analyst price target on BAC is $12.
- The moribund housing market does not appear to have any catalysts to turn it around in the short term.
- Civil and federal litigation will continue to provide significant headwinds for at least the medium term
- The overall challenges for the financial sector (European debt crisis, increasing regulation, overall rancor in congress toward financial firms, etc..) seem unlikely to fade in the foreseeable future.
Prognosis: Bank of America has a ridiculously low valuation. At the same time, their balance sheet and prospects are very opaque. I think the best way to play this is use options to play the long term value of Bank of America while limiting your investment. I am buying the Jan 13 10 calls for $1.10. I think it represents a great play if B of A turns around and limits your downside.