It's not always easy owning
Boeing's best-selling F/A-18 fighter jet is the preferred plane
of the Navy's Blue Angels. But should investors prefer Boeing
A true giant of global industry, Boeing is arguably the
aerospace and defense stock
on the planet. With $88.4 billion in annual sales, and $5 billion
in annual profits, you'd think
might offer stable, dependable -- even uneventful profits for
investors. But in fact, it's done anything but.
In 2012, for example, Boeing shares lagged the rest of the
S&P 500 badly, rising 5%, but underperforming "the market" by
10 percentage points. In 2013, management turned things around,
and Boeing stock surged 77%, easily outperforming the index.
Today, as we approach the two-thirds point in 2014, Boeing is
down 7% against an 8%
in the S&P.
What goes up must come down -- and then go up again, then
down again, then...
In short, Boeing stock has turned out to be surprisingly volatile
for a large cap. But that's not necessarily a bad thing for
investors. To the contrary, the more volatile Boeing's swings,
the more chances we have to sell it when it's overvalued -- then
buy it back again when Boeing is underpriced.
So which is it today? Is Boeing overvalued at its current
price of more than $125 a share? Or is Boeing cheap?
Priced at 18.4 times earnings today, and 15.6 times forward
earnings (according to S&P Capital IQ data), Boeing stock
sells for a slight premium to other stocks in the
Aerospace and Defense
industry, where 14.7 is the more usual forward P/E. Given
Boeing's strong competitive position, however, its rock-solid
balance sheet boasting net cash after debt, and the robust free
cash flows it generates, a small premium is probably justified.
, after all, one-half of a global duopoly of large airplane
is the other half.)
That said, just saying that Boeing isn't unreasonably priced
to other aerospace and defense manufacturers doesn't mean it's a
safe stock to buy. It doesn't mean that the stocks we're
comparing Boeing to aren't expensive in the first place -- and it
doesn't mean that Boeing isn't overpriced in its own right. So
how do we figure out this part of the Boeing valuation
The big picture
Historically, aerospace and defense stocks in the U.S.
tend to sell
for valuations of roughly 1x sales. (That's not a hard-and-fast
rule -- just something I've picked up on from following this
the past decade or so
). Fast growers, which are projected to grow at better than 10%
annually, tend to fetch somewhat more than 1x sales. Strong
profits producers -- greater than a 10% net profit margin --
likewise receive higher valuations.
But by and large, 1x annual sales is usually a fair price to
pay for an aerospace and defense industry company like Boeing.
And how much does the industry sell for today, you ask?
Oh, about 1.6 times sales.
Focusing in on Boeing
While far from dispositive, this does appear to suggest that
aerospace and defense companies, as a whole, are selling for more
than they're worth today. The fact that Boeing costs even more
than the average, when valued on P/E, therefore seems a strike
But that's just the thing: Boeing costs more than the average
aerospace and defense contractor when valued on
But when valued on sales, Boeing currently sells for a
price-to-sales ratio of 1.0 -- as in, almost precisely on-the-dot
the "normal" price for a stock like Boeing.
There are caveats to this analysis, too, of course. Notably,
Boeing currently sports a below-average net profit margin of
. There's also the fact that the company's long-term projected
earnings growth rate is only 10%, while its revenue growth is
stuck in neutral, and its defense business appears to be
. If that's the way things play out, then we could see Boeing's
price-to-sales ratio rise above the magic "1.0 mark" as revenues
decline in future years.
When all's said and done, right now, I think the valuation on
Boeing stock looks at least fair -- and maybe even cheaper than
the stock deserves, for a company of this caliber. I'm not sure
I'd buy it until the discount to fair value becomes more
clear-cut -- but I certainly see no need to sell it.
And one more thing...
Did we mention that Boeing also pays is shareholders a tidy
2.2% dividend yield? That's key. The smartest investors know
simply crush their non-dividend paying counterparts over the
long term. They also know that a well-constructed dividend
portfolio creates wealth steadily, while still allowing you to
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Like its best-selling 737 airliner, Boeing stock has staying
Is It Time to Buy Boeing Stock?
originally appeared on Fool.com.
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