An analysis of Boeing company for Finance class. Designed to feel like a professional stock review including industry trends, catalysts, and potential growth using a FCF model.
1. The Boeing Company
NYSE: BA
Jacob Brink& Rob Hollon
Target Price: $149.63 CurrentPrice:$128.82 Recommendation: Buy/Hold
Business description:
Boeingisthe largestmanufacturerof commercial aircrafts(by2013 deliveries) competinginaduopolywithAirbus andis
the secondlargestU.S. militaryweaponsmanufacturer. The Boeing737 Max has a plannedintroductionsetfor2017
withfirmordersforthe newplane at1,876 throughApril 2014. Last year the companyannouncedthe Boeing777X with
deliveriesslatedfor2020. On the otherhand, the defense sectoraccountsforaboutone thirdof Boeing’stopline.
Boeingcompeteswithinthe defensesectorwithfourotherbigdefense contractorsandmanysmallercompanies.
Recentlythe companyintroducedasmartphone that‘self-destructs’if unauthorized usersattempttouse it.
CurrentPrice $124.12
Market Cap $91.51B
Sharesoutstanding737.08 million
EPS (last12 months) $5.97
P/E 20.81
Investmentsummary
A 12 monthtarget price of $149.63 isdeterminedusingafree cashflow model.Boeingexpectsgrowthof 5%annually
for the next20 yearswhile Airbusproclaims4.7%.Ouropinionisthatthismightbe a little toooptimistic butfairlyclose
to an actual value which spurredouropinionof 4.5% growth.The global economyisimproving,whichaccordingto
Boeingaccountsfor 60-80% of the growth inrevenue passengerkilometers(discussedindetail later).The stockprice
has retreatedabitsince January1, butwe remain bullishregardingthe company’sprospects. While the defense
industryisverylikelytoshrinkthisyear,the commercial aerospace industryispoisedtogrow especiallyinemerging
markets. The 12 monthtarget price reflectsall these factorstakeninto account.
Financial metrics
Boeing Financials (millions USD)
2013 2012 2011 2010 2009
Revenue $86,623 $81,698 $68,735 $64,306 $68,281
NetIncome $4,586 $3,903 $4,011 $3,311 $1,335
Total Assets $92,663 $88,896 $79,986 $68,565 $62,053
Total Debt $9,635 $10,409 $12,371 $12,421 $12,924
Equity $14,875 $5,867 $3,515 $2,766 $2,128
NetOperation Cash Flow $8,179 $7,508 $4,023 $2,952 $5,603
ROE 30.83% 66.52% 114.11% 119.70% 62.73%
ROA 4.95% 4.39% 5.01% 4.83% 2.15%
Profit Margin 5.29% 4.78% 5.84% 5.15% 1.96%
Debt to Equity 0.65 1.77 3.52 4.49 6.07
2. In 2010 Boeingexperiencednegativerevenue growthof 5.82% while the industryhadnegativegrowthof about
2%.For the nextthree yearsBoeingincreasedrevenue growth atarate above the commercial aerospace industry
average. Boeinghasdecreaseditstotal debtalongwithitsdebttoequitywhichsignalsthatthe companyisbecoming
lessvulnerable toeconomicdownturns. Notstatedabove yetstillnoteworthyisBoeing’stotal currentliabilitieswhich
standsat $51,486 million.Thisisnotuncommonforanaircraft manufacturerandtheircurrentratio is1.26 which
suggeststhatBoeingwill be able topaythese liabilities.Inthe firstquarterof 2014 Boeingincreasedtheirquarterly
dividendfrom$.485 to $.73 per share.Thissignalsthatthe companyis comfortable withtheircurrentfinancial standing.
Profitmarginincreasing
Debtto equitydecreasing
CheckROE/ROA
Industry Analysis
2013 Sales Market
Cap
Current Price P/E Current
Ratio
Debt to
Equity
Net Margin
Boeing 86.62B 91.51B $126.88 20.81 1.26 65.5 5.29
Airbus 81.86B 55.60B $70.49 27.73 0.97 50.87 2.47
LockheedMartin 45.36B 50.01B $158.81 17.16 1.2 125.09 6.5
General Dynamics 31.22B 36.60B $105.76 15.95 1.47 26.95 7.96
Raytheon 23.71B 30.30B $99.42 15.64 1.69 42.9 8.15
Northrop Grumman 24.66B 25.66B $119.69 14.24 1.63 55.84 7.92
Airbus financials converted from Euros atconversion of 1.38:1 U.S.D.
Aerospace
Keyforcesthat drive thataerospace industryare oil prices,economicgrowthanddevelopment,environmental
regulations,infrastructure,airplanecapabilities,othermodesof transport,andemergingmarkets.The forcescan
significantlyhelporhinderthe profitabilityof manufacturers. Assuchaircraftmanufacturersmustadaptto changesin
these forcestoremaincompetitive. Forinstance,fuel now comprisesthe largestportionof anairline industrycost
structure whichpressuresmanufacturerstodevelop more fuel efficientplanes.
The two aircraft manufacturerseffectivelycompetinginthe
industryare BoeingandAirbus.Competitionbetweenthe duo is
intense andfocusesonthe numberof ordersanddeliverieseach
companycan attain.Airlinesselectacompanybasedonfactors
such as financing,fuelefficiency, maintenance,andseat
capacity. Introductionof the AirbusA320neoisscheduledfor
late 2015 while the comparable Boeing737 Max 8 inscheduled
for introductionin2017. The successof these companieshingesonhavingasteadyflow of ordersand makingdeliveries
as scheduled.If aircraftsare notdeliveredonschedulethenthere are usually heftyfinesplacedonthe manufacturer.In
thismanner,some of the riskis placedonthe manufacturerratherthan the airline company. A verycritical factorfor
bothcompaniesismeetingthe planneddeadline forthe introductionof theirnew aircrafts. Forthe firstquarterof 2014,
Boeingreceivedmore ordersandfulfilledmore deliveriesthanAirbus.Airbus’sbacklogisabithigherthan Boeing,which
isthe total numberof ordersminusthe total numberof deliveries.
Sourcesare positive regardingthe growthof the airline industryoverthe comingyears. Historicallygrowthin
revenue passengerkilometers(RPK) hasoutpacedGDP.SourcesforecastgrowthinRPKas a functionof GDP growthand
a time trendvariable thattypicallycentersat2%.The GDP growthvariable accountsfor60-80% of air trafficgrowth
while the time trendaccountsforthe other20-40%. Thisrelationshipcanbe seenoverthe longterm, yetunexpected
economiceventscandirectlyorindirectly cause declinesinairtraffic.InBoeing’s CurrentMarketOutlook2013-2032 the
companyprojectsthat worldwide airtrafficandcargo trafficwill grow at a compoundannual rate of 5% overthe next20
years.Thisaccordingto S&P may be a little tooptimistic. Incolloquial termspositive RPKgrowth isdue tostrong
demandinemergingmarketssuchasLatin America,Africa,Middle East,andAsiaPacificaswell ascontinueddemandin
Europe and the Americas. Otherfactorsinclude the needformaintenance,repair,andoverhaul onexistingplanesand
the businessjetmarket takingoff once again.
Airbus Boeing
Backlog 5,521 5,154
Q1 2014 Deliveries 141 161
Q1 2014 Orders 103 235
3. Defense
The defense industryconsistsof the bigfive defense contractorsalongwithmany smallercompanies.The topsix in
orderof 2012 revenue are LockheedMartin,Boeing,BAESystems(aBritishcompany),Raytheon,General Dynamics,and
NorthropGrumman.Currentlythe U.S.governmentisreducingitsspendinginmilitaryequipment.Asaresult,those
companiesthatderive alarge portionof theirtopline fromtheirdefenseproductswillbe influencedthe most. Lockheed
Martin, BAE Systems,andRaytheonall deriveover90% of theirrevenuesfrommilitarysales. Thistrendof reducingthe
budgetinthe defense sectorwilllikelycontinueforthe 3-5 years.Overthe longtermthe industryisprojectedtogrow
at 3%.
Since militaryproductsaccountsforaboutone thirdof theirrevenue,Boeingwill face headwindinthe nextfew
yearsdue to the fact that the U.S. governmentiscuttingspendingondefense.However,thiswill be offsetbythe large
growththat is expectedinthe commercialairline industry.Asthe global economyimproves,the commercial aerospace
industrywill improve aswell.Aftermarketservicesare likelytogainmore businessaswell asfleetsare startingtoage
for manyairlines.
Valuation
For The BoeingCompanyvaluationwe usedadiscountfree cashflow model todetermine the futureprice.First
we forecastedaflat4.5% growthacross the company,and usedtocome upwiththe free cash flow forthe next3 years
and beyondthat,thenwe discountedthose valuesbythe weightedaveragecostof capital,withwe determinedtobe
9.87%.
Date 4/22/2014 G=4.5%
in$ millions
2013 2014 2015 2016 2017
OperatingCashflow 8,179.00 8,547.06 8,931.67 9,333.60 9,753.61
less:Capex 2,098.00 2,192.41 2,291.07 2,394.17 2,501.90
FCF 6,081.00 6,354.65 6,640.60 6,939.43 7,251.71
Discountrate (WACC)
PV(14-16) 5783.84 5501.20 5232.37
PV( 2017 and beyond) 101840.67
FirmValue 118,358.07
Less:Long termDebt 8,072.00
EquityValue 110,286.07
# sharesoutstanding( millionshares) 737
Target price $149.64
The assumptionswiththe model are thatBoeingcontinueswithaconstant4.5% growthrate.As well asthat theirdebt
staysconstant.
Some risksto the recommendationwouldbe thatinorderforBoeingto keepaconstant 4.5% growthrate, Chinas
economyneedstostaystable andcontinue growing.A lotof theirnew businessiscomingfromthe amountof airports
beingbuiltoverthere.Anotherfactoristhat Boeinghasbeenreducingthere longtermdebtoverthe pastfive yearsand
lookas if theyplanon continuingtodoso. Thiswill change theirWACC,ultimatelyalteringthe model slightly.There are
otherfactors that couldhave an effectsuchasmissinga deliverydate,ora large rise inoil prices.
Catalysts
4. CatalystsforThe BoeingCompanyandtheyare oil prices, the threatof new entrants,andothermodesof
transportation.Oil priceshave alarge effectonthe companyas a whole.Oil price effectsthe overalldesignprocessof
the BoeingCompany.If theyexpectoil pricestorise thentheywill be lookingtomanufacture more fuel efficientplanes
like the 787 Dreamliner,becausetheywill be more indemand.Boeinghastobe able toadjustits productionbasedon
oil prices.
The nextmajor catalystisthe threat of new entrantsinto the market.Companieslike ComacandBombardier
whichare startingto become real competitorsandmayevenbe acause of worryin the longterm. Comac is the
Commercial AircraftCorporationof China,andBombardierisaUS base companythat specializesinmidsizedaircrafts.
These companies are playersinthe businessjetmarketand inthe longrun couldthreatenBoeingssales.Comacis
startingto gainsome traction,and couldbreakup the duopolythatBoeingandAirbushave onthe market.
Modesof transportationsuchas highspeedrail (HSR) canpotentiallypose athreatforthe airline industry.HSR
islikelymore efficientforshorterjourneysandcarryingcargo. Howeveraviationisefficientforlongerjourneysandasa
meansof transportationwithoutheavycostsoninfrastructure.
Management
The BoeingCompanyhasa veryexperiencedmanagementteam.W.JamesMcNerneyhasbeenthe CEOfor
aroundnine yearand before thatwasthe CEO of 3M and has heldtopexecutivepositionsatGE and Proctor&Gamble.
He alsoisthe Chairmanof the Export Council andwasappointedbyPresidentObamahimself.Theyoperate asan
advisorycommittee oninternational trade.Boeing’sCFOGregSmithhasbeenonboard withBoeingsince asthe CFO
since 2010, but has workedforBoeingsince 2008. Priorto beingthe CFOat Boeinghaswas the VPfor Raytheon,aswell
as a controllerforBoeingsfinancial operations.Boeing’sleadengineerJohnJ.Tracy has servedasthe general mangerof
EngineeringforBoeingsMilitaryAircraftandMissiles,he wasalsothe directorof the Space and Communications
AdvancedEngineer.Tracyhasauthoredmore thanthirtypublicationsandcurrentlyservesonthe boardof trusteesfor
the IllinoisInstitute of Technologyandonthe engineeringadvisoryboardforseveral leadinguniversities.
Wall Street consensus
No. of
Recommendations % of Total
Buy 13 48%
Buy/Hold 7 26%
Hold 7 26%
WeakHold 0 0%
Sell 0 0%
No opinion 0 0%
Total 27 100%
Recent News
Earningsannouncedonthe 23rd
of April withbuy-sideanalystexpectingBoeingtobeatthe estimates.
Deliveriesof the 787-9 are to start mid-year
Boeingnamed2014 EnergyStar partner of the year.