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Using a Value Line Report: Boeing’s Huge Backlog – December 16, 2011
Boeing (BA – Free Value Line Research Report for Boeing) is one of only a few major aerospace and defense companies around the world. Its products, from commercial aircraft like the iconic 747 to military jets like the similarly famous F-15, are, in many cases, household names and workhorses in the industries it serves. The Business Description provides an extended list of products and services the company offers, but it wouldn’t be overextending the truth to say that Boeing’s reach extends worldwide.
As the Graph shows, the 2007 to 2009 recession wasn’t kind to Boeing shareholders, with the issue dropping from a high of about $107 per share in 2007 to a low of $29 in 2009. (The high and low prices for each year are displayed atop the Graph.) Although the stock price has recovered somewhat since then, it has largely been range bound between $60 and $80 a share for about two years.
Lengthy delays in a new, reportedly revolutionary, aircraft have been an important constraint on the shares. Indeed, the 787, which makes use of new materials to save weight and reduce fuel costs, was a material black eye for the company, as it suffered delay after delay. Although such delays with new aircraft aren’t uncommon, the market doesn’t take kindly to broken promises. Now, however, the first of the 787s has been delivered, as noted in the Analyst Commentary.
Although one might have expected this to result in Boeing shares advancing, the delivery has come at an inopportune time. In fact, the new aircraft has arrived as world governments appear set on cutting back. Nowhere is this more keenly felt than in Boeing defense business, which is highly dependant on U.S. government spending. Here, budgetary impasses appear set to result in mandatory defense spending cuts. This couldn’t have happened at a worse time for Boeing stock.
That said, the negative view that uncertain defense spending cuts might have should be well balanced by a $273 billion backlog on the commercial side (noted in the Analyst Commentary). Simply put, the company’s products are large, costly, and time consuming to make. As such, the order docket can stretch years in to the future. Although customers can, and often do, alter their plans before construction even begins, much of that $273 billion is likely to come into the commercial unit’s coffers. In other words, Boeing will be able to sustain its business.
Add to this the company’s Financial Strength Rating of A+ (the second best Value Line category and found in the Ratings box), $9 billion of cash on the balance sheet (found in the Current Position box), and reasonable debt levels (found in the Capital Structure box), and the company appears well positioned for the future. Note, with regard to debt, the size of the company’s manufacturing facilities and products, and the length of time that it takes to build its products, leads to a higher debt load than some other companies might be able to carry. This is especially true because Boeing does not build anything without a customer in line to take delivery—so a build will result in an order.
The feared defense cuts, meanwhile, are uncertain, to say the least. There is no way to determine at this point if any cuts will happen or what programs, and thus companies, will be cut or eliminated. So, in the end, Boeing, which will likely feel some impact if there are cuts, may not be hurt as much as some fear. Note that defense is viewed as more of a necessity than an option, with deep cuts very difficult to push through government channels. That said, uncertainty is not something Wall Street likes and, thus, Boeing shares could continue to remain range bound until there is some clarity.
The massive backlog, however, is a nice bulwark for the aerospace and defense giant and its shareholders. Thus, the three- to five-year earnings projection of $7.25 per share (found to the right of the labels on the Statistical Array in bold) has material underpinnings. That earnings projection works out to a projected price range of some $90 to $120 per share, as noted in the Projections box and by the dotted lines to the right of the Graph. Taking into account the stock’s recent 2.4% dividend yield (found in the Top Label across the top of the report), leads to an annualized total return of between 8% and 16%. While growth investors might not see this as compelling, more conservative investors should find this very rewarding, especially given Boeing’s reach, size, and importance in the world.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.