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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


September 27th 2015

NYSE Symbol: BA
Industry: Aerospace
Price as of 9/26: $131:01


  The correction continues as the third quarter comes to an end this week. We've finally had a 10% correction, the most volatility we've seen since 2011. With third quarter earnings coming out in October we should see more volatility as many companies will report disappointing numbers and lower guidance. The main culprit for the poor earnings remains China. Caterpillar last week dropped 8% after lowering guidance for the quarter and the full year. However Nike jumped 8% on Friday after easily beating quarterly estimates thanks to strong sales in, you guessed it, China. The commodities remain the sector to avoid. There is no quick turnaround for that sector. To be honest we should see more bankruptcies in the oil patch in the coming quarters. The disappointing guidance from Caterpillar hit a number of industrials like Deere, but not all industrials are created equally. This week we'll highlight an industrial where business is improving and cash flow is about to take off. The featured stock of the week is Boeing. We last highlighted Boeing in January at exactly the same price so with a 1% dividend in the pocket, Boeing's stock has sadly outperformed the Dow which is down 8.5% year to date. Even though Boeing's stock hasn't gone anywhere, business remains strong. Last week Boeing received a $38 billion deal with three Chinese companies to sell them 300 planes. The total back log of planes awaiting construction stands at 5710 planes and counting for Boeing so the fundamentals are only improving Boeing. The recent pull back is a real opportunity to buy a blue chip stock because once the correction is over, Boeing's stocks should soar once again.

As it stands now, Boeing will report third quarter earnings around October 21st. At currently pricing, Boeing is trading for 16 times earnings and 14 times next year's earnings. Not overly cheap, but cheaper than the broader market. What's more appealing is the cash flow from operations. On Monday, Barron's wrote an article saying the cash machine at Boeing is only getting started. Boeing is expected to achieve higher 787 production rates coupled with productivity gains at BCA as automation investments aid flow time and reduce labor costs. Barron's forecasts over $4.5 billion in free cash flow in the second half d this year and an incredible $25 billion in free cash flow during the 2016-18 years. When you break down the numbers, Boeing will generate $6.6 billion, $7.2 billion, $8.6 billion and $8.9 billion, respectively, during the 2015-18 period. Given Boeing's visibility and continued strong execution, Barron's sees no reason why a mid-teens free cash flow multiple cannot be achieved especially if Boeing comes down the learning curve as planned on the 787 program. Boeing currently trading at 2016 and 2017 free cash flow multiples of only 13 times and 10 times respectively based on their market cap. If Boeing trades for 15 times 2017 free cash flow that means the stock has 50% upside or go from $131 a share up to $200 a share.  

With the fundamentals only improving, that sounds like good risk reward for Boeing shareholders.