| Bears Say |
We Say |
| The P/E ratio is over 30 - that is overpriced for a stock like Boeing. |
As Value investors we look at cash flows over earnings. This company is expected to
earn enormous cash flows because the company has been investing in the right resources and it gets
cash advances on its airplane orders. It's return on
assets has been growing steadily over the past 5 years so it has been earning more for every dollar
of invested asset. |
| With the Democrats taking control of Congress defense spending may slow |
Defense spending comprises more than half of Boeing's revenues in 2006.
Defense spending is typically more stable than commercial aircraft. However, defense
spending is expected to slow. The slowdown in defense should be offset by the pickup in Boeing's
commercial segment and we expect the same solid growth in 2007 as in 2006.
Our forecasts
assume that the commercial segment will comprise of a larger percentage of orders going forward.
It is the commercial segment that offers more risk compared with the defense sector
because the past history has shown that this revenue stream has not grown as steadily. Even
Though we estimate that revenue growth will grow by 15% for 2007, this growth will gradually
slow to its historical growth rate of 4% after 10 years. Also the higher growth assumptions come
with higher Beta assumptions, we assume the Beta to be .8 compared with the historical Beta of .65.
Aircraft spending is closely tied to the health of the airline industry. It appears that airlines have
been able to obtain higher prices from its passengers. |
| There appears to be a substantial amount of off-balance sheet liabilities. Boeing has $86.2 billion
of purchase obligations not recorded on the balance sheet. This compares with an even smaller Balance
Sheet Total Asset amount of $51.8 billion. |
As long as long as Boeing is getting orders for new aircraft, the contractual obligations will have
no problem getting met. These purchase obligations are essentially agreements with Boeing's suppliers.
It is actually a good hedge against inflation since the prices and quantities have already been agreed upon.
Besides, all of the bond rating agencies rate Boeings debt very highly with S&P rating
of A+, Fitch rating of A+, and Moody's rating of A2. If the bond market is not concerned we
are not concerned. |
| Gross margins at 18% are at the upper end of Boeing's historical Gross margins. If
Boeing's competitors increase production and drive down prices, that should surely have an impact
on Boeing's Margins and thus Boeing's stock price. In fact Airbus is doing just that - it is increasing production of the
short route single aisle A320 to generate the cash needed to fund the development of the A380 mega jet and
A350 wide body due to complete in 2013. The increase production of the A320, which competes directly with Boeing's 737 may force
Boeing to lower its price and thus lower margins. Given that a majority of Boeing's commercial revenues in 2006 were attributable
to the 737 the impact may be significant to the bottom line. |
With delay's with the production of the Airbus A380 Boeing can command higher prices for its
higher end 747's and 787 Dreamliners. The competition with the 737 is a major concern to us as well. If margins get squeezed by just
1%, our forecast puts Boeing fair value at only $91/share. The risk of margin compression is real and that is why we recommend long
term call options over the stock because the Boeing is becoming a riskier company as its revenues become more dependent on the more
volatile commercial segment and less dependent on the defense segment. Further commercial backlogs have been growing every year.
Boeing's 2006 commercial order backlogs for is 6.12 times its 2006 revenues. This has grown from 2.5 times revenues in 2002.
2/3 of the backlog orders are foreign. Therefore
if the world economy remains strong and the dollar remains weak Boeing should continue
to see new orders. Boeing's strong management and execution
will keep Boeing ahead of it's Airbus rival for the foreseeable future |
