Boeing is Dow Cinderella

Matein Khalid discusses why the firm is undervalued in an overvalued market

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Published: Mon 28 Jul 2014, 9:48 AM

Last updated: Sat 4 Apr 2015, 3:13 AM

This public execution is unjustified since Q2 profit was up 52 per cent, thanks to commercial aircraft order flow. Boeing’s 2.42 EPS beat Wall Street consensus by a huge margin and actually raised its earnings forecast. Boeing and Airbus operate capitalism’s most successful duopoly, with government subsidies implicit in the business model, from Exim Bank loans and the geopolitical umbrella provided by Uncle Sam and the Pentagon. Boeing is the ultimate too-big-to-fail business for America.

The most interesting metric for me in Boeing’s Q2 was the fact that it delivered 30 Dreamliners (out of 181 deliveries). This is essential as any increases in Dreamliner production reduces its break even price, the next big theme in Boeing shares. I had recommended and profiled Boeing in successive columns in the 70-75 range three years ago and the shares subsequently doubled before their miserable 2014 trading range. Boeing produces 10 Dreamliner 787 jets every month and management just confirmed a 715-725 delivery aircraft target for 2014. Boeing’s order backlog is $440 billion. No typo here; 440 billion buckeroos. This means a $8 EPS forecast is totally doable. So, in my valuation paradigm, the world’s finest aircraft manufacturer (pardonez moi, cher Airbus!) trades at 16 times earnings. This is real. This is value, unlike Bombardier or Embraer.

Boeing is one of the few large-cap bargains on the NYSE since the commercial aerospace cycle is just going gangbusters, where 12-13 per cent growth means a credible EPS growth target in the 15 per cent range. This is higher than market EPS growth consensus. So, in the admittedly surreal world of Mattinomics, Boeing is undervalued in a market that is, in my view, overvalued.

I entirely grasp the fact that a lower Pentagon budget, sequestration and terrorism risks (now at 32,000 feet. What a shame, what a world!) are all negative for Boeing. Yet international commercial aircraft sales growth is accelerating, if the grapevine from Farnborough and Le Bourget is right. Another rise in commercial margins once 737/Dreamliner production ramps higher and the share count reduces via $1 billion share buybacks. The world’s airlines will absolutely love the Boeing 777X and the MAX. In the past decade, Boeing’s valuation range was 15-24 times earnings with a median multiple of 19. So if I am right, Boeing is a classic candidate for a valuation rerating.

Boeing Commercial Airplanes, or BCA, is now 64 per cent of operating profit, dwarfing the bottom line contribution of the defence business. Boeing is the world’s fourth-largest military contractor, with brands that include Chinook helicopters, Globemaster troop transports, the K-46 air refuel tanker, the F-18 Super Hornet and the F-15 Eagle, as well as intelligence/surveillance aircraft for the CIA/NSA and Nasa satellites. My thesis is that decline in military sales in the US will be offset by new arms races in South-east Asia, the Arabian Gulf, Eastern Europe and Japan/Korea. Geopolitical tensions in the world are rising, not falling.

However, international air traffic growth, the rise of state-owned airlines/budget carriers, the fleet replacement cycle, fuel economies of scale and a steep rise in airline profitability all means my conviction that BCA could well contribute 70 per cent of Boeing operating profit by 2016. The easy money in Boeing was made in 2011-13 (the Dreamliner rally!). Boeing is now 21 points below its recent 144 peak. Boeing was a Dow Cinderella in 2014 while the ugly stepsisters (Looney Tunes-valuation junk sectors) soared in value. No problem. Investing is a marathon, not a sprint. I, for me, cannot imagine a world without Boeing, a company that literally shrank the global village in the 20th century.

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