Almost exactly three years ago, I posted this article seekingalpha.com/article/249485-boeing-early-boarding-for-investors-seeking-good-mid-term-prospects. At the time Boeing (NYSE:BA) was trading around $70. The article suggested that was the time to build a position in the stock. Key rationale included:
- Defense spending might not be cut as much as being discussed by the political pundits at the time.
- The Dreamliner would most likely make it off the runway, and would trigger a wave of airplane buying from the airlines.
- Backlog was at $320b and book to bill was increasing.
- At the peak of the previous cycle, Boeing earned over $5/share and commanded a multiple over 20. There was a high probability that in the current cycle earnings per share would be higher and the multiple at least as large as the previous cycle. That meant $100/share seemed highly probably and $120 not out of the question.
Fortunately for me, my thesis was right. The stock has pretty much gone straight up, to its recent high of $144. One of the advantages of blogging is it provides a permanent record of the rational for buying a stock. That record provides a good baseline to use to mange the holding. In this case, with most of my thesis having worked out, the stock past my "target" price, and earning to be released this week, it is time to re-evaluate the position.
Looking at the same key assumptions from before
- US Defense spending has been "un-sequestered". It does not seem like peace is breaking out across the world, and many other countries are likely to increase their defense spending. Hence, this segment of Boeing's business should continue to perform at least adequately.
- The commercial airline business continues to be a unique company in the world. It has a huge moat to competitor entry. They are building planes at an increasing rate, and seem to have their labor costs somewhat under control for at least this cycle.
- Backlog last quarter was at $415m, but book-to-bill was almost flat.
- Boeing will likely announce earnings over $6 per share in 2013. I'll let the company and stock analysts set expectations for 2014, but there is every reason to think it will be higher. Likely well over $7 per share.
Making somewhat aggressive assumptions of $7.50 a share and a 22 p/e yields a target price of $165. That seems like an optimistic scenario. It also does not represent a huge upside from the current price. Hence taking profits at this point might be appropriate. Conversely, it does not seem like there are too many downside risks. Earnings of $7 per share earnings seems fairly locked in by the large order backlog. Applying a more conservative peak cycle p/e of 18 puts a lower level of $126.
Hence my view is that the stock may have achieved a cruising altitude. It may be safe to move around the cabin, but wearing seat belt is probably a good idea in case of turbulence. Given this view, I plan to write call options against at least part of my position for awhile. For example, if the market has any bounce on Monday I'll be looking to sell the Feb. $145 call. Then rolling that call throughout the year.
My forecast for Boeing for the next year or two is it will drift gently higher from here. That means
- My unrealized capital gain will continue to grow in a modest, but tax efficient manner.
- The 2+% dividend will continue.
- There is the good potential to harvest several percentage points in covered call option premium through the year.
In an overall investing environment where good alternate choices to deploy capital are more limited than a few years ago this seems like a decent potential return.
Of course, my forecast could be wrong.
- If the stock continues to fly significantly higher, I'll let the call be assigned and start to reduce my position.
- If the stock falls, the covered call will at least provide some cushion to the loss.
Disclosure: I am long BA.
Additional disclosure: This posting is for informational, educational and entertainment purposes only and should not be considered investment advice.