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In considering my 2011 picks I took a look at Boeing Co (BA), interested by the story. There are many ways for this company's future to play out in a very positive scenario.The airline industry has been rejuvenated as of late -- and that is good news for aircraft manufacturers. The Republicans won the house majority and that usually improves the fortunes of defense contractors.
The 787 Dreamliner, now three years and counting behind schedule, is in test flight mode. The plane portrayed as a dream to travelers and airline companies has turned into a nightmare of sorts, or at least the dream has changed. Boeing is dreaming of the day they start manufacturing and selling and profiting from all their labor.
Boeing is also in the midst of reviewing whether it will continue to evolve the popular, but dated 737 passenger aircraft or design a new model altogether. It is cheaper to do the former but, in the long run, more competitive to sell something more fuel efficient -- perhaps using some of the lessons learned from the Dreamliner.
You could make a good case for buying into Boeing's story: new planes, improving airline business cycle, and even the company's new $35 billion defense contract (Boeing Wins $35B USAF Contract). But that's just the beginning. In the end the numbers have to make sense -- and that is where I get lost.
The P/E ratio around 18 is much higher than other defense contractors and the overall market. The PEG ratio at 1.91 is twice what I would like to see. Its annual earnings per share growth is less than 4%. I like the fact that the business has high barriers to entry, but hate all the debt on the books. I like the 2.32% dividend yield, but frown at the tight profit margins.
I find all the metrics erratic. A price-to-sales of 0.76 is wonderful, but a price-to-book over 10.0 is terrible.
When all is said and done, Boeing looks like it will be seeing brighter days ahead and indeed may be a worthy investment to some. However, when I look at the metrics, the capital spending and all the production delays, all I see is cloudy skies.
Sheldon Liber is an architect and the CEO of Chasing Value™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money and is on twitter: @ChasingValue. Disclosure: Mr. Liber does not own shares and/or options of BA.
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Reader Comments (Page 1 of 1)
2-28-2011 @ 1:16PM
Yon said...
One has to have brass cojones to write such an article about one of the US industrial giants. Afraid of being sued by Boeing's pack of attorneys? Naaaahhh.... But, remember the same attorneys have to justify their jobs and Boeing does not like articles that might lower their stock's value. Priorities first and making a safe aircraft is not the top one.