The news was mostly bad for the industrial sector when the latest durable goods orders data were reported last week. Orders, excluding transportation, fell by 0.4% in July, leaving industrials like Caterpillar (CAT), Cummins (CMI) and the Industrial Select Sector SPDR (XLI) scrambling for cover. Yet, Boeing (BA) shares caught some lift from the report, as you can see in the five day chart.
The reason was because while the data mostly dampened the outlook for industrials, it offered more good news for Boeing . You see, overall durable goods orders increased by 4.2%, driven by a 14.1% increase in orders for transportation equipment. Of course, those could include things like railcars from FreightCar America (RAIL) or Mack Trucks by AB Volvo (VOLVY.PK).
However, a closer look at the details of the report showed that orders for non-defense aircraft and parts increased by 54%. Odds are that smaller aircraft makers are not the reason for the gains in the segment. Rather, demand for commercial aircraft made by the likes of Boeing , Airbus - owned by EADS (EADSY.PK), and Bombardier (BBD-B.TO) are the reason. Of those, Boeing had a blockbuster month, as it signed tentative contracts to deliver 250+ planes. It was unfortunate, though, that the company had some of the wind pulled from under its wings by a second news item Friday. Qantas Airways cancelled $8.5 billion worth of orders for 35 of Boeing's new 787 Dreamliner wide-body jumbo jets. That kept its altitude limited to a 1.0% gain Friday.
The stock is down 0.9% on the year, after adjustment for dividends. It's down 4.8% since I authored my article, A380 Issues Could Lift Boeing, within which I tempered enthusiasm for Boeing on positive competitive aspects with concerns about commercial orders in a deteriorating global economy. Obviously, those global macroeconomic concerns are even more justified today than they were when I was talking about them in May and even before that.
Though earnings estimates are still being ratcheted higher for fiscal year 2012 (December). Estimates have taken flight to $4.71 at the consensus, up from $4.56 90 days ago. However, you can see economic concerns creeping into the 2013 outlook. Analysts have cut those numbers on average, to $5.61, from $5.67 just 90 days ago. That's only going to serve to rein in the company's long-term growth outlook and temper enthusiasm for the shares.
Looking at the stock's valuation today, BA trades at 13.8X my EPS estimate for the next 12 months, which is simply the average of the 2012 and 2013 consensus figures. Analysts see the five-year growth outlook at 10.6%, and growth in 2013 at 19.1%. Thus, the PEG ratios on the 5-year outlook and 1-year outlook are 1.3X and 0.55X, respectively. It seems to me the company can still manage to grow at its valuation rate, but it is also burdened by the deteriorating macroeconomic backdrop which could cut into growth.
So, once again, I have to call Boeing a hold for those already holding it and a soft buy for those in need of industrial exposure. Boeing is going to be sensitive to positive economic data for exaggerated upside gain. It will also benefit from decent near term earnings reports. I have question about the duration of impact of any positive economic data, though, and do not think it would be lasting; whether it be Federal Reserve action or blips in economic data flow. BA's beta ratio is 1.2, so you would expect modest sensitivity to macro-drivers. However, Boeing's five-year average P/E and average low P/E ratios of 17.2 and 12.9, respectively, compare against the current trailing 12-month P/E of 12.3X. Thus, the stock is valued better for upside surprise than downside and incorporates a good deal of the market's concern already. Though, just as estimates have already come down and some orders have been cancelled, more of the same could follow for all industry players, in my view.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.