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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Boeing

August 8th 2014 Boeing
NYSE Symbol: BA
Industry: Airline manufacturer
Price as of 8/8: $120.63

The major averages dropped at the end of July producing only the second down month for the year. Things have not improved in August, statistically the worst month of the year for the major averages. Tensions in Ukraine, IRAQ, and a debt default in Argentina haven't helped sentiment as money managers move to the sidelines. Still waiting for a 10% correction, the major averages are off 4% from the July highs. We'll see what the rest of August and September bring us. With the recent pullback, a number of stocks are getting more attractive. In fact, one fifth of the Dow Jones Industrial Average is in a 10% correction. This week we'll highlight the worst performing Dow component year to date, Boeing. Besides Airbus, Boeing is the only other major airline manufacturer in the world. The stock came under pressure back in January following disappointing earnings due in part to slow defense spending. Earnings for 2014 will not grow much which explains the underperformance, but longer term the fundamentals remain strong for Boeing and very strong for their customers, the airline industry. Boeing's stock may continue to lag the broader market in the short term, but longer term the stock looks attractive at current levels trading for 14 times earnings while the broader market still trades for 17 times earnings. A recent upgrade from CRT Capital for Boeing with a $169 price target shows there is the potential for 40% upside if the company's fundamentals reaccelerate in the coming years.
Back in July, the Chicago-based company reported net income of $1.65 billion, or $2.24 per share, from $1.09 billion, or $1.41 per share, in the same quarter a year ago. Revenue climbed 1.1 percent to $22.05 billion. Favorable tax items include the previously announced tax benefit of $116 million for the 2007-2008 tax settlement, as well as an additional tax benefit of $408 million in the second quarter helping the company raise guidance for the full year and for the quarter. In reality, the earnings increase of $0.75 is overstated as it received the $408 million tax benefit. Negating this, Boeing increased guidance by $0.20. The Boeing Chairman and Chief Executive Officer Jim McNerney said the company delivered their first 787-9 and their 8,000th 737, successfully completed a key missile defense intercept test, and delivered our 100th EA-18G Growler to the U.S. Navy. The backlog for Boeing is impressive with a 7 year backlog equaling $63 billion in sales or 2 years' worth of revenue. 36% of that back log coming from overseas so long term Boeing is well positioned to outperform. However in the short term the recent quarter was messy with the defense division showing limited growth. The commercial aviation continues to grow with a backlog numbering in the thousands. The 787 productions is also ramping which will boost profits and margins. With its massive backlog, BA can potentially generate 8+% earnings growth through 2020.
As mentioned Boeing trades for 14 times earnings, 1 times sales, and generates over $7 billion in operating cash flow a year with a dividend yield of 2.2%. The company returns a majority of the cash back to shareholders in the form of a dividend and share buybacks which should allow for upward earnings revisions. CRT Capital raises their Boeing target to $169 from $165 this week indicating Boeing remains a favorite large cap idea in aerospace. They went on to say the disconnect between solid fundamentals and low expectations is unwarranted. CRT continues to believe that Boeing is in the early innings of aerospace cycle with mass production of the 787. Once Boeing gets their sales to reaccelerate, the earnings estimates should get ratcheted higher along with a higher PE making price targets like $169 a share more achievable.