Download BoeingCo_0315 - Trulaske College of Business

Boeing Co.
Ticker: BA
Sector: Industrial Goods
Industry: Aerospace and
Defense – Major Div.
Recommendation:
BUY
Screening and Investment Rationale
Based on the Economics Committee’s recommendation,
a company in the Aerospace and Defense industry was
selected for analysis. Using MSN Money’s Stock
Screener, Boeing was selected using the following
screening criteria

Position Size: $25,046
Number of Shares: 280
Pricing
Closing Price


$89.45
(3/13/07)
Stop-Loss
52 Week High
52 Week Low
$72.00
$30.90
$16.68
Profitability &
Effectiveness (ttm)
ROA
ROE
Net Margin
Operating Margin
4.93%
27.93%
3.60%
5.96%
Market Data
Total Assets
$51.79B
Market Cap
$70.60B
Avg. Vol. (3mo) 4.094M
EPS (ttm)
2.81
P/E (ttm)
31.81
P/FCF (ttm)
18.9
Ben Phillips
[email protected]

Return on Equity > Industry Average Return on
Equity
Market Capitalization > $5B
Industry name = Aerospace/Defense – Major
Diversified
Price/Book Value = Low as possible
This query resulted in only Boeing Co. Although its
stock has a relatively high Price/Book ratio compared to
its industry, it maintains the best ROE in the industry.
k
%
Investment Highlights
Company Profile1
154,000 employees primarily in the US.
Boeing is the world's leading aerospace company and the
largest manufacturer of commercial jetliners and military
aircraft combined. Additionally, Boeing designs and
manufactures rotorcraft, electronic and defense systems,
missiles, satellites, launch vehicles and advanced
information and communication systems. As a major
service provider to NASA, Boeing operates the Space
Shuttle and International Space Station. The company
also provides numerous military and commercial airline
support services. Boeing has customers in more than 90
countries around the world and is one of the largest U.S.
exporters in terms of sales.
1
http://www.boeing.com
1
Boeing has a long tradition of aerospace leadership and innovation. They continue to
expand our product line and services to meet emerging customer needs. A broad range of
capabilities includes creating new, more efficient members of our commercial airplane
family; integrating military platforms, defense systems and the warfighter through
network-centric operations; creating advanced technology solutions that reach across
business units; e-enabling airplanes and providing connectivity on moving platforms; and
arranging financing solutions for our customers.
Headquartered in Chicago, Boeing employs more than 150,000 people across the United
States and in 70 countries. This represents one of the most diverse, talented and
innovative workforces anywhere. More than 83,800 of their people hold college degrees-including nearly 29,000 advanced degrees--in virtually every business and technical field
from approximately 2,800 colleges and universities worldwide. The enterprise also
leverages the talents of hundreds of thousands more skilled people working for Boeing
suppliers worldwide.
Check it out
2006 Highlights (Year Ended 12/31/06) 2
 Revenue growth of 12% to $61.5 billion
 Gross profit growth of 23% to $11.1 billion
 Steadily increasing R&D expenditures involving experimentation, design,
development and related test activities for defense systems, new and derivative jet
aircraft including both commercial and military, advance space and other
company-sponsored product development.
o These expenditures are expensed as incurred including amounts allocable
as reimbursable overhead costs on U.S. Government contracts.
o Total R&D expense amounted to $3.3 billion, $2.2 billion, and $1.9 billion
in 2006, 2005, and 2004, respectively net of R&D cost sharing payments
from suppliers of $160 million in 2006, $611 million in 2005 and $205
million in 2004 related to Boeing’s 787 program.
 $706 Million in cash at end of 2006
Company Highlights
 Largest exporter in the United States
 Largest aircraft manufacturer in the world
 Boeing’s stock is a component of the Dow Jones Industrial Average
 Note: An unrealized amount of additional revenue probably exists due to defense
contracting with the US government
2
www.boeing.com
2
Market Position and Risks
Boeing maintains an excellent position in the market with few notable risks from the
company’s perspective. It appears that the world’s largest commercial and military
aircraft producer will hold that title for decades to come. As their privately-owned
commercial airline competitor, Airbus, continues to face one challenge after another,
Boeing’s share price remains on the steady increase. Their partnership with competitor
Lockheed Martin also contributes to sustainable earning possibilities in the future. In
addition, the US government offers favorable treatment and provides. Boeing became the
world’s largest civil aircraft company in terms of orders (with 55% of orders in its market
segment) in 2006, overtaking Airbus for the first time since 2000.
Last Monday, Boeing announced three separate orders totaling $4.6 billion from:
Continental Airlines (five 787-9 Dreamliners at $900m; twenty-five 787s ordered todate), Kuwait's Aviation and Lease Finance (twelve 787s and six 737-800s at $2.26b) and
Russian air cargo carrier Volga-Dnepr (five 747-8 freighters at $1.4b with an option to
buy five more). In its latest press release, Boeing says it has recorded 475 Dreamliner
orders among 37 airlines valued at more than $70b (at current list prices) since the 787
launch in Apr. 2004. Boeing currently forecasts its first 787 deliveries next May and
MarketWatch reports most production slots are sold-out until 2011-2012. Reuters says
Boeing had 64 plane orders year-to-date as of the end of last month, compared to 90 for
rival Airbus. Boeing's shares gained 1.9% to $91.20 yesterday and traded as high as
$91.87 intra-day. It is currently trading near its 52-week and all-time high.3
3
http://seekingalpha.com/by/symbol/ba
3
On September 20, 2006 Boeing finalized a deal to purchase Dallas-based Aviall, Inc. for
$1.7 billion and retain $350 million in debt. Aviall became a wholly owned subsidiary of
Boeing Commercial Aviation Services (BCAS). Aviall's CEO, Paul E. Fulchino will
report to BCAS' General Manager/Vice President, Lou Mancini.
Other opportunities lie within future prospects for Boeing includes the launch of new
long range aircraft and four new concept designs for the commercial industry. The 777200LR Worldliner embarked on a well-received global demonstration tour in the second
half of 2005, showing off its capacity to fly farther than any other commercial aircraft.
On November 10, 2005, the 777-200LR set a world record for the longest non-stop flight
from Hong Kong to London taking a longer route, which included flying over the U.S. It
flew 11,664 nautical miles (21,601km) during its 22-hour 42-minute flight.
In May 2006, four concept designs being examined by Boeing were outlined in the
Seattle Times. Codenamed after the well-known Muppets (the design team is known as
the Green Team), the designs concentrated primarily on reducing fuel usage. "Fozzie"
employs open rotors and would offer a lower cruising speed. "Beaker" has very thin, long
wings, with the ability to partially fold-up to facilitate easier taxiing. "Kermit Kruiser"
has forward swept wings over which its engines are positioned, with the aim of lowering
noise below due to the reflection of the exhaust signature upward. "Honeydew" with its
delta wing design, resembles a marriage of the flying wing concept and the traditional
tube fuselage. As with most concepts, these designs are only in the exploratory stage
intended to help Boeing evaluate the potentials of such radical technologies
A notable risk is the high negative correlation of Boeing’s stock price and the price of
crude oil. As oil prices rise, the stock price tends to fall and the opposite is true for
decreasing oil prices. Although oil prices have less of an impact on Boeing’s operations,
commercial airlines face narrower margins when jet fuel prices are high. Plane ticket
prices increase resulting in reduced consumer demand. This leads to a reduction in
capital expenditures for new aircraft purchases due to tighter cash flow.
An additional risk is intense competition with Airbus. Airbus products are still
outnumbered 6 to 1 by in-service Boeings although indicative of historical success Airbus made a late entry into the modern jet airliner market (1972 vs. 1958 for Boeing).
Boeing has continually protested over "launch aid" and other forms of government aid to
Airbus, while Airbus has argued that Boeing receives illegal subsidies through military
and research contracts and tax breaks.4 It appears that Airbus will always be kept afloat
despite performance issues, but the same argument can be made against Boeing.
To effectively and profitably compete, Boeing will focus on new product technology,
improving processes and continuing cost reduction efforts. They plan on continuing to
leverage their extensive customer support services network for airlines throughout the
world to provide a higher level of customer satisfaction and productivity.
4
http://en.wikipedia.org/wiki/Airbus
4
More key risks faced by Boeing are regulatory issues. Government contracting,
commercial aircraft, environmental, and international regulations have significant effects
on business operations.5
Valuation
Boeing has paid consistent quarterly dividends throughout its history. Therefore, the
standard Gordon Growth model is utilized in the valuation in addition to the Two-Stage
FCFE Discount and the Owners’ Earnings Models. The first step towards finding an
intrinsic value is determining the stock’s beta. Comparing Boeing’s weekly performance
to the S&P 500 over the past three years, a beta of 1.097 is determined.
This beta is then applied to the CAPM to determine the company’s discount rate.
Rf = 4.79%
Rp = 3%
Beta = 1.097 Re = 4.79% + 1.097(3%) = 8.08%
0.1
y = 1.0972x + 0.0043
0.08
0.06
0.04
0.02
0
-0.06
-0.04
-0.02
-0.02
0
0.02
-0.04
-0.06
-0.08
5
http://www.sec.gov/Archives/edgar/data/12927/000119312507033902/d10k.htm
5
0.04
The Gordon Growth Model
Growth rate
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
Output from the Gordon Growth Model
Firm Details: from inputs on prior page
Current Dividends per share =
$1.20
Cost of Equity =
8.08%
Expected Growth rate =
7.00%
Value
($142.31)
$1,599.83
$118.77
$61.12
$40.89
$30.58
$24.32
$20.13
$17.11
Two-Stage FCFE Discount Model (Appendix B)
This was selected to contrast a stable growth model such as the Gordon Growth model.
This model takes earnings per share, capital spending, depreciation, revenues, and
working capital figures into account in determining a stock’s value. Inputting the values
for Boeing based on their most recent financial statements, using a 9% first stage growth
rate and a 7% stable growth rate, we produce the following results:
Growth Rate in Stable Phase =
7.00%
FCFE in Stable Phase =
$2.06
Cost of Equity in Stable Phase =
8.08%
Price at the end of growth phase =
$190.23
Present Value of FCFE in high growth phase =
$12.61
Present Value of Terminal Price =
$87.45
Value of the stock =
$100.07
Owners’ Earnings Model
This model takes data from current financial statements, along with future growth
assumptions, and produces an intrinsic value per share for the stock. I assumed a first
stage growth of 9% followed by a second stage growth period of 7%.
Sum of present value of owner earnings
$56,114,672,206.7
Residual Value
Owner Earnings in year 10
Second Stage Growth Rate (g) (add)
Owner Earnings in year 11
Capitalization rate (k-g)
$
11,727,919,646.3
7.00%
$
12,548,874,021.5
1.08%
6
$
1,161,932,779,771.99
Value at end of year 10
Present Value of Residual
Intrinsic Value of Company
$534,229,226,716.39
$590,343,898,923.09
Shares outstanding assuming dilution
Intrinsic Value per share
789270000
$747.96
All of these valuation methods produce intrinsic values of significantly above the current
stock price of Boeing. The models assume a moderate second stage growth rate of 7%.
Lowering the second stage growth rate below 6% makes the first two valuations less
attractive, but for the Owners’ Earnings model results in an intrinsic value of $93.10 per
share with both first and second stage growth rates at 1%. I believe Boeing will be able
to sustain a growth rate of at least 7% in the future due to consistent support by the US
government and global airline companies.
Industry and Competitor Analysis
Boeing is one of the few participants in the Aerospace/Defense – Major Diversified
industry. This explains strong return on equity in the chart below. Return on equity for
Boeing beats the entire industry.
BA VS. INDUSTRY LEADERS
Statistic
Industry Leader
BA
Rank
BA
Market Capitalization
BA
70.60B
-
1/4
P/E Ratio (ttm)
BA
31.81
-
1/4
PEG Ratio (ttm, 5 yr expected)
BA
1.20
-
1/4
Revenue Growth (Qtrly YoY)
RTN
11.40%
N/A
N/A
EPS Growth (Qtrly YoY)
RTN
31.30%
N/A
N/A
Long-Term Growth Rate (5 yr)
RTN
15.7% 15.5%
2/4
Return on Equity (ttm)
BA
27.93%
-
1/4
Long-Term Debt/Equity (mrq)
BA
2.013
-
1/4
Dividend Yield (annual)
RTN
1.80% 1.50%
2/4
7
Market Cap:
Employees:
Qtrly Rev Growth (yoy):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper Margins (ttm):
Net Income (ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr expected):
P/S (ttm):
DIRECT COMPETITOR COMPARISON
BA
Pvt1
LMT
70.60B
N/A
40.93B
154,000 550,001 140,000
N/A
N/A
6.00%
61.53B 26.41B1
39.62B
18.03%
N/A 10.20%
5.95B
N/A
4.42B
5.96%
N/A
8.61%
2.21B
N/A
2.53B
2.812
N/A
5.795
31.81
N/A
16.72
1.2
N/A
1.45
1.17
N/A
1.07
NOC
25.48B
122,200
4.60%
30.15B
18.20%
3.27B
8.51%
1.57B
4.367
16.66
1.35
0.86
Industry
23.68B
9.70K
12.20%
20.29B
18.03%
2.27B
5.94%
49.96M
2.81
32.43
1.2
1.17
Pvt1 = Airbus S.A.S. (privately held)
LMT = Lockheed Martin Corp.
NOC = Northrop Grumman Corp.
Industry = Aerospace/Defense - Major Diversified
Source: Yahoo Finance
Boeing directly competes with Airbus, Lockheed Martin, and Northrop Grumman Corp.
in the Aerospace/Defense markets although Airbus is their only sizeable commercial
aircraft competitor. Boeing’s P/E and P/S ratios are at or below the industry average,
suggesting that the stock is currently undervalued compared to its industry.
V. Ratio Analysis
Investment Returns
ROE
ROA
ROC
ROE (5 yr)
ROA (5 yr)
ROC (5 yr)
BA
27.9
3.9
8.2
20.8
3.5
6.1
Industry
24.4
5.5
9.7
16.6
3.8
4.0
S&P 500
21.3
8.0
10.4
20.0
6.5
8.6
Margins %
Gross
Pre-Tax
Net Profit
Gross (5 yr)
Pre-Tax (5 yr)
Net Profit (5 yr)
BA
18.0
5.2
3.6
15.3
4.3
3.5
Industry
13.6
5.9
3.4
14.4
5.4
3.8
S&P 500
36.7
19.1
13.4
35.7
17.1
11.7
Source: MoneyCentral
8
Boeing’s returns beat the industry averages in the long run, but profit margins remain
tight compared to the industry and the S&P 500. Note the stellar ROE and above
industry average gross margin. The above average gross margin and below average net
margin are a sign that Boeing has higher overhead costs relative to competitors. Many of
the overhead costs associated with government contracts are later reimbursed; therefore,
the recent increase in government work is most likely the reason for higher overhead.
Increased R&D expenditures also contribute to lower net margins, but the optimistic
analyst views these expenditures as critical investments in the future of Boeing.
VI. Analyst Recommendations
The mixed ratings are a positive signal in my opinion. When analysts disagree on a
certain stock, I feel it is an opportunity to capitalize on the discrepancy. The table below
also shows that the past year has produced mixed feelings regarding Boeing’s stock.
UPGRADES & DOWNGRADES HISTORY
Date
Research Firm
Action
From
To
28-Feb-07 JP Morgan
Upgrade
Underweight
Neutral
22-Jan-07 Wachovia
Downgrade
Outperform
Mkt Perform
Upgrade
Hold
Strong Buy
Downgrade
Buy
Reduce
27-Oct-06 Matrix Research
14-Sep-06 UBS
16-Aug-06 Stifel Nicolaus
Initiated
14-Jun-06 Goldman Sachs
Upgrade
Underperform
In-Line
Downgrade
Buy
Neutral
5-Jan-06
Banc of America Sec
9
Buy
WSJ Markets Industry Comparison
10
VII. Recommendation
Pros
Cons
Strong ROE
Focused corporate strategy
Consistent US government support
Many global growth opportunities
Airbus
Decreased profit margins in 2006
Significant regulations in industry
Expected increase in oil prices
#1 in the business!
Highly competitive industry
Boeing continues to dominate the Aerospace and Defense industry and is expected to be
the front-runner for the extended future. Strong management, support by the US
government, and international customers provide many future opportunities for Boeing.
I recommend that we purchase 280 shares totaling $25,046 or 1.93% of the portfolio
value.
Appendix A
Employment Numbers
*From Wikipedia
Employment By Location
Employment by Group
(Division)
Employment By Location
Arizona
4,618
California
28,209
Kansas
2,988
Missouri
15,822
Pennsylvania
4,859
Texas
4,815
Washington
68,570
Other Locations
24,200
Total Company 154,081
Employment By Group
(Division)
Integrated Defense
72,251
Systems
Commercial Airplanes
56,782
Connexion by Boeing
68
Boeing Technology
12,319
Finance & Shared
10,508
Services
Human Resources &
891
Administration
Corporate
1,261
Other
1
Total Company
154,081
As of 01/31/2007
As of 01/31/2007
11
Appendix B
Capital spending and Depreciation during Stable Growth
Is capital spending to be offset by depreciation in stable period?
No
Do you want to compute your reinvestment rate from fundamentals?
Yes
Return on equity in stable growth period
8%
If no, enter capital expenditures as % of depreciation in stable growth
0%
Output from the program
Cost of Equity =
8.08%
Proportion of Debt: Capital Spending (DR)=
9.93%
Proportion of Debt: Working Capital (DR)=
9.93%
Current Earnings per share=
$2.81
(Capital Spending - Depreciation)*(1-DR)
$1.92
Change in Working Capital * (1-DR)
$0.02
Current FCFE
$0.87
Growth Rate in Earnings per share
Growth Rate
Weight
Historical Growth =
32.81%
40.00%
Outside Estimates =
9.00%
60.00%
Fundamental Growth =
12.08%
0.00%
Weighted Average
18.53%
Growth Rate in capital spending, depreciation and working capital
High Growth
Stable Growth
Growth rate in capital spending
=
20.00%
Do not enter
Growth rate in depreciation =
20.00%
Do not enter
Growth rate in revenues =
18.00%
6.00%
12
(Yes or No)
(in percent)
Working Capital as percent of revenues =
0.03%
(in percent)
The FCFE for the high growth phase are shown below (upto 6 years)
1
2
3
4
5
Earnings
$3.33
$3.95
$4.68
$5.55
$6.57
- (CapEx-Depreciation)*(1-DR)
$2.30
$2.76
$3.32
$3.98
$4.77
-Chg. Working Capital*(1-DR)
$0.00
$0.00
$0.00
$0.01
$0.01
Free Cashflow to Equity
$1.03
$1.18
$1.36
$1.56
$1.79
$0.95
$1.01
$1.08
$1.14
$1.22
Present Value
Growth Rate in Stable Phase =
7.00%
FCFE in Stable Phase =
$2.06
Cost of Equity in Stable Phase =
8.08%
Price at the end of growth phase =
$190.23
Present Value of FCFE in high growth phase =
$12.61
Present Value of Terminal Price =
$87.45
Value of the stock =
$100.07
Estimating the value of growth
Value of assets in place =
$10.81
Value of stable growth =
$75.65
Value of extraordinary growth =
$13.61
Value of the stock =
$100.07
Appendix: Financial Statements
Income Statement
All numbers in thousands
PERIOD ENDING
31-Dec-06
31-Dec-05
31-Dec-04
Total Revenue
61,530,000
54,845,000
52,457,000
Cost of Revenue
50,437,000
45,849,000
44,675,000
13
Gross Profit
11,093,000
8,996,000
7,782,000
Research Development
3,257,000
2,205,000
1,879,000
Selling General and Administrative
4,025,000
4,228,000
3,657,000
Operating Expenses
Non Recurring
797,000
(520,000)
(20,000)
Others
-
-
-
Total Operating Expenses
-
-
-
3,014,000
3,083,000
2,266,000
420,000
389,000
379,000
3,434,000
3,472,000
2,645,000
240,000
653,000
685,000
3,194,000
2,819,000
1,960,000
988,000
257,000
140,000
-
-
-
2,206,000
2,562,000
1,820,000
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Discontinued Operations
9,000
(7,000)
52,000
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
17,000
-
Other Items
-
-
-
2,215,000
2,572,000
1,872,000
-
-
-
$2,215,000
$2,572,000
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
Balance Sheet
14
$1,872,000
All numbers in thousands
PERIOD ENDING
31-Dec-06
31-Dec-05
31-Dec-04
6,118,000
5,412,000
3,204,000
268,000
554,000
319,000
Net Receivables
8,122,000
8,062,000
7,260,000
Inventory
8,105,000
7,940,000
4,247,000
370,000
-
70,000
22,983,000
21,968,000
15,100,000
Long Term Investments
4,085,000
12,491,000
13,435,000
Property Plant and Equipment
7,675,000
8,420,000
8,443,000
Goodwill
3,047,000
1,924,000
1,948,000
Intangible Assets
1,698,000
875,000
955,000
-
-
-
11,255,000
14,240,000
13,928,000
1,051,000
140,000
154,000
51,794,000
60,058,000
53,963,000
22,614,000
26,999,000
17,989,000
Short/Current Long Term Debt
1,381,000
1,189,000
1,321,000
Other Current Liabilities
5,706,000
-
1,525,000
29,701,000
28,188,000
20,835,000
Long Term Debt
8,157,000
9,538,000
10,879,000
Other Liabilities
9,197,000
8,937,000
9,128,000
Deferred Long Term Liability Charges
-
2,336,000
1,835,000
Minority Interest
-
-
-
Negative Goodwill
-
-
-
47,055,000
48,999,000
42,677,000
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Other Current Assets
Total Current Assets
Accumulated Amortization
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Total Current Liabilities
Total Liabilities
15
Stockholders' Equity
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Preferred Stock
-
-
-
Common Stock
5,061,000
5,061,000
5,059,000
Retained Earnings
18,453,000
17,276,000
15,565,000
Treasury Stock
(12,459,000)
(11,075,000)
(8,810,000)
Capital Surplus
4,655,000
4,371,000
3,420,000
(10,971,000)
(4,574,000)
(3,948,000)
Other Stockholder Equity
Total Stockholder Equity
4,739,000
Net Tangible Assets
($6,000)
16
11,059,000
11,286,000
$8,260,000
$8,383,000
Cash Flows
All numbers in thousands
PERIOD ENDING
31-Dec-06
31-Dec-05
31-Dec-04
Net Income
2,215,000
2,572,000
1,872,000
Depreciation
1,559,000
1,526,000
1,524,000
Adjustments To Net Income
1,538,000
1,784,000
1,546,000
Operating Activities, Cash Flows Provided By or Used In
Changes In Accounts Receivables
(244,000)
Changes In Liabilities
1,047,000
(592,000)
4,263,000
Changes In Inventories
444,000
(1,965,000)
Changes In Other Operating Activities
940,000
(588,000)
Total Cash Flow From Operating Activities
(241,000)
1,705,000
611,000
(3,559,000)
7,499,000
7,000,000
3,458,000
(1,681,000)
(1,547,000)
(978,000)
(141,000)
(2,742,000)
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
Investments
35,000
Other Cashflows from Investing Activities
(1,540,000)
1,590,000
2,351,000
Total Cash Flows From Investing Activities
(3,186,000)
(98,000)
(1,369,000)
(956,000)
(820,000)
(648,000)
Sale Purchase of Stock
(1,404,000)
(2,459,000)
(662,000)
Net Borrowings
(1,680,000)
(1,378,000)
(2,208,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
Other Cash Flows from Financing Activities
395,000
Total Cash Flows From Financing Activities
(3,645,000)
Effect Of Exchange Rate Changes
38,000
Change In Cash and Cash Equivalents
$706,000
17
-
(4,657,000)
(37,000)
$2,208,000
-
(3,518,000)
-
($1,429,000)