In this article, let's take a look at The Boeing Company (BA, Financial), ), a $88.78 billion market cap company, which is the largest aircraft manufacturer in the world, and one of the largest aerospace and defense giant that conducts business through three operating segments.
Boeing Commercial Airplanes (61% of revenues in 2013) and EADS's Airbus division are the world's only makers of 150-plus seat passenger jets. Boeing Defense, Space & Security (38%) is the world's fourth largest military contractor. Boeing Capital Corp. (1%) primarily finances Boeing aircraft for airlines.
Commercial Segment
Boeing operates in a commercial aircraft duopoly with Airbus, in a market that Boeing estimates at $5.2 trillion (36,770 aircraft with 15,500 replacements) during the next 20 years. Further, competitors in countries such as Canada and China are a threat in this promising market.
The commercial airplanes segment is getting better due to the increase in passenger and freight traffic. Innovation is expected to strengthen its balance sheet and regain market share. The 737 re-engine allows the company to strengthen its balance sheet, for example by offering airlines greater fuel efficiency, while the firm can focus on the development of other aircraft variants.
Defense Segment
This segment contributes to more than a third of the firm's earnings. In order to maintain its profits, Boeing lowered budgets and proactively cut staff. Official Statistics shows that those sectors expanded at good annual rates in the past. However, the history can change due to pressure resulting from high U.S. budget deficits. Total defense cuts could reach $1 trillion over the next nine years to 2021. Defense sector could decline to 31% of total sales in 2015 versus 50% in 2010.
Revenues, Margins and Profitability
Looking at profitability, the revenue growth by 1.05% has outpaced the industry average. Earnings per share increased by 59% in the most recent quarter compared to the same quarter a year ago ($2.24 vs $1.41). During the past fiscal year, the company increased its bottom line by earning $5.97 vs $5.12 in the prior year. This year, Wall Street expects an improvement in earnings ($8.10 vs $5.97).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| BA | Boeing Co. | 30.82 |
| LMT | Lockheed Martin Corp | 60.61 |
| EADSF | Airbus Group NV | 13.25 |
| UTX | United Technologies Corp | 17.95 |
| Â | Industry Median | 11.91 |
The company has a current ratio of 30.82% which is higher than the one exhibit by Airbus (EADSF, Financial) and United Technologies Corp. (UTX, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. For investors looking for a higher ratio, Lockheed Martin Corp (LMT, Financial) could be the option.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 18.5x, trading at a discount compared to an average of 20.8x for the industry. To use another metric, its price-to-book ratio of 6.32x indicates a premium versus the industry average of 2.58x while the price-to-sales ratio of 1.05x is below the industry average of 1.17x. These ratios indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $34.890, that is a 28.4% compound annual growth rate (CAGR).
Final Comment
Air travel has grown 1.5% faster than GDP over many years. We see price appreciation over the next several years as commercial aircraft demand remains strong. International passenger air traffic has grown by an average of 6% annually in the last ten years. However, the defense sector is unpredictable due to uncertainty of the annual government budgeting and also election cycles.
In the last 5 years, sales increased at a CAGR of 7.3%, net income from continuing operations at a CAGR of 11.6%, EPS at 10.3%, and dividends per share at 3.7%. So in this opportunity, I would recommend fundamental investors to consider this attractive option for their long-term portfolios.
Hedge fund gurus like Ray Dalio (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Bill Frels (Trades, Portfolio), Sarah Ketterer (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
