Valuation Of Boeing

Jun.29.12 | About: The Boeing (BA)

In this article, I take a look at Boeing (NYSE:BA) a commercial aircraft manufacturer that may offer investors upside potential that outweighs the risks.

We'll use the management effectiveness ratios, book value-share, price-sales, price-book value, etc., to evaluate Boeing.

Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe the economy is contracting.

According to the estimates, the U.S. economy could be in recession in 2013 or 2014. The common equity share price of Boeing is forecast to decline.

Airline stocks are highly correlated with economic growth. Boeing's revenue depends on the airlines. If economy enters recession, orders for new airlines will decline and Boeing's revenue will be adversely impacted. In other words, Boeing's earnings are strongly correlated with the economic cycle.

Rating System

Buy - Be long

Neutral - No position

Sell - Be short

(The ratings, research and analysis in this article should be considered as starting point for further research.)

Boeing - Sell

Boeing, the commercial aircraft manufacturer, has a quick ratio of 0.42 and a gross margin of 18.2 percent.

Shares of Boeing are trading near a recent peak while revenue-share and book value-share are increasing. Price-sales and price-book value are off of recent peaks.

Revenue from product sales increased compared to the year-ago quarter while revenue from service sales declined compared to the year-ago quarter.

In the first quarter of 2012 and 2011, the enterprise did not provide investors with high-quality earnings.

Second quarter 2012 revenue is forecast to grow to $17.5 billion, an increase of 5.9 percent over the year-ago quarter and a decline of almost 10 percent from the first quarter of the year. Revenue-share is forecast to grow to 97.7. Given the forecast for a recession in the U.S. in 2013 or 2014, investors should distribute shares of Boeing.

Legal Proceedings

Boeing is involved in a legal battle with the U.S. Navy. The legal dispute is over a government contract to build A-12 aircraft for the U.S. Navy; should Boeing win, they could be entitled to just over $1B in recourse. In the event of Boeing not winning, the firm could pay just under $2B. Overall, currently Boeing isn't facing long-term material risks from litigation.

Dividend

Recently, the board approved a 44 cent per share dividend. The dividend remained the same and is expected to remain the same or decline in the coming quarters.

Price Forecast
Baseline Alternative Baseline Adverse
2012 $60 $55 $80
2013 $43 $39 $75
2014 $50 $44 $60
Click to enlarge

In the baseline scenario, the holding period's rate of return is roughly 39 percent over the next year and a half. In the alternative baseline scenario, the hold period's rate of return is roughly 45 percent over the next year and a half. The adverse scenario suggests a holding period's rate of return of roughly 18 percent, but occurs in 2014. The current priced used for estimates is $71. The return assumptions do not include dividend payments as skillful investors may be able to negate the costs of dividends.

Click to enlarge.Click to enlarge

Book value-share is increasing; the increase in book value-shares is considered bullish.

Click to enlarge

Currently the share price is increasing, although the share price is expected to decline as economic headwinds adversely impact valuations.

Click to enlarge

Price-sales is bouncing off of a trough, and savvy investors should be looking for places to short-sell shares.

Click to enlarge

Price-book value is expected to decline in the coming months.

Macro Environment

GDP Forecast
Baseline Alternative Baseline Adverse
2012 +2.3 +1.8 +1.8
2013 -0.5 -1.5 +1.5
2014 +2.4 +1.6 -0.5
Click to enlarge

In the baseline scenario, I see growth continuing through 2012 with a recession in 2013 and growth resuming in 2014. Under the alternative baseline scenario, growth this year is slower than the baseline scenario and the recession in 2013 is deeper. In the adverse scenario the recession occurs in 2014. Under the baseline and alternative baseline scenarios, US equities are in a bear market during 2012 and/or 2013.

Click to enlarge

ISM non-manufacturing PMI is declining; the index is expected to continue to decline in the coming months.

Click to enlarge

Non-farm employment change is declining; the pace of job growth is expected to continue to slow.

Click to enlarge

CB consumer confidence is increasing; the index is expected to decline in the coming months.

Click to enlarge

European Union flash manufacturing PMI is declining; the index is expected to increase in the coming months.

Click to enlarge

European Union flash services PMI is declining; the index is expected to increase in the coming months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.