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In this article I take a look at Boeing (NYSE:BA), a commercial aircraft manufacturer. We'll use the management effectiveness ratios, book value-share, price-sales, price-book value to evaluate Boeing. Further, we'll examine the financial statements to assess the firm's financial position and performance.

My time frame as an investor is 3-9 months. The technical term is an intermediate-term investor. Typically, the longer the time horizon of your projections the less accurate the projections. I try to keep my price and value projections to one-three quarters. Long-term investors have a time frame of 9 months to roughly 2 years. And buy-and-hold investors have a time frame of 2+ years.

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

Investors with a long position is Boeing probably won't want to hear that I am bearish on the share price over the next 3-9 months and over the next 2 years. Investors without a position in Boeing can consider short selling shares of the firm.

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 0.39 and a gross margin of 17.27 percent. The prior quick ratio was 0.42 and gross margin was 18.2 percent at the end of the first quarter: The firm became less liquid and gross margin declined.

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 27 percent compared to the year-ago quarter while revenue from service sales declined 8 percent compared to the year-ago quarter. Total revenue came in at $20B, better than my estimate of $17.5B, increasing 21 percent compared to the year-ago quarter. Total costs and expenses increased 27 percent. Research and development spending decreased 18 percent. Earnings from operations increased 1 percent. Expense management was clearly an issue this quarter as top line growth didn't become bottom line growth.

Total current assets increased 3.6 percent while total current liabilities increased 2.8 percent. The increase in total current liabilities is mostly attributable to an increase in deferred taxes. Long-term debt decreased 12.8 percent. Pension liabilities remains at roughly $16B. Total equity increased 63 percent. The increased in total equity is considered bullish. Boeing has about $1B in receivables owed to it by firms with a "junk" credit rating.

In the first six month of 2012 and 2011, the enterprise did not provide investors with high-quality earnings. The poor quality of earnings is mostly attributable to inventory increases. In the year's first six months, the firm didn't generate enough cash from operating activities to cover investing and financing activity. Dividend payments and debt repayment was roughly the size of cash generated in operating activity. Further, the firm used $3.6B in investing activities. With $6B in cash, Boeing remains liquid and able to continue its dividend payments for the foreseeable future.

Segment Data

I'll be watching Boeing Military Aircraft for revenue declines as federal defense spending reductions could cause revenue to decline.

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 the court doesn't find in Boeing's favor, the firm could pay just under $2B. Overall, currently Boeing isn't facing long-term material risks from litigation.

Backlog

Currently, the backlog of orders increased in almost every business segment. However, we could see a slowing of the pace of new orders and a decline in backlogs.

Dividend

Recently, the board approved a 44 cent per share dividend.

Price Forecast

 BaselineAlternative BaselineAdverse
2012$60$55$80
2013$43$39$75
2014$50$44$60

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.

Investment Thesis

Boeing looks like an excellent equity investment opportunity. Revenue-share is increasing, book value-share is increasing, the firm is undervalued based on the price-sales and price-book value valuation metrics. All of that is great, however, I am forecasting a bear market and a recession in the U.S. over the next two years. Further, I expect U.S. equity prices to decline in the next 3-9 months. Investors may want to buy puts or sell calls. Short-term traders should be looking to sell rallies.

Valuation

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Revenue-share is increasing: the increase is considered bullish for the share price of Boeing.

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Book value-share is increasing: the increase is considered bullish for the share price of Boeing.

(click to enlarge)The share price is near a previous peak, a resistance zone, sellers may overwhelm buyers at this level.

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Price-sales is near a previous trough: the valuation metric suggests Boeing is undervalued.

(click to enlarge)Price-book value is near is previous trough: the valuation metric suggests Boeing is undervalued.

Macro Environment

GDP Forecast

 BaselineAlternative BaselineAdverse
2012+2.3+1.8+1.8
2013-0.5-1.5+1.5
2014+2.4+1.6-0.5

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.

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

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Non-farm employment change increased recently. My expectation is for the pace of job growth to remain sluggish in the coming months.

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

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 bear risk and thus his opinions may not be suitable for all investors.

Source: Boeing Is Overvalued