The Boeing Company (NYSE:BA) continues to have problems with its new 787 Dreamliner aircraft, which are currently grounded pending further review of the safety of their lithium-ion batteries. This development comes after the company experienced good financial results in 2012, with revenue rising an impressive 19% and pretax income growing 10% compared to the previous year (earnings were down on a higher effective tax rate). This growth occurred despite a notable decline in net income in the company’s fourth quarter compared to Q4 2011 (though of course the fourth quarter results might be more predictive of business in 2013 than performance earlier in the year). In addition, over 100% of the increase in operating income was derived from cuts to R&D; while the completion (such as it is) of the Dreamliner is a legitimate reason to reduce these expenses, it’s unlikely that Boeing can sustain income growth in this way.
The stock currently trades at 17 times trailing earnings. We aren’t convinced that The Boeing Company can continue to grow its operating income as much as it did last year, and if earnings grow at a somewhat slower rate than the company might be fairly valued or even overvalued at that level. It is possible that effective tax rates were abnormally high in 2012, and so correcting earnings in that way would leave a lower earnings multiple. Analyst expectations imply significant earnings growth over the next couple years, whatever the case, resulting in a forward P/E of 12.
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How does Boeing compare to its peers?
Boeing is best compared to aerospace and defense companies, which we’d note have more exposure to U.S. military spending (which may be decreased, or at least see smaller increases, in coming years due to budgetary issues). These include Lockheed Martin Corporation (NYSE:LMT), Northrop Grumman Corporation (NYSE:NOC), and Raytheon Company (NYSE:RTN). These three stocks, in recognition of the threat to their business, carry trailing earnings multiples of 11 or lower placing them at a discount to Boeing. Analyst expectations are generally flat for all three companies: Lockheed Martin and Raytheon are valued at 10 times expected earnings for 2014 while Northrop Grumman’s forward P/E is 9. So in those terms the gap narrows, to the point where Boeing is slightly more expensive but likely has better prospects. In value terms, therefore, all four seem priced about fairly relative to each other. Income investors should note that Lockheed Martin pays a 5% yield, with Raytheon and Northrop Grumman’s dividend yields over 3% as well.
With aircraft demand sometimes seen as sensitive to macro conditions, we can also consider Caterpillar Inc. (NYSE:CAT) as an alternative to Boeing. An 18% decline in the last year has left the machinery company valued at ten times its trailing earnings, but it was recently forced to write down a Chinese acquisition and experienced a decline in business in the fourth quarter of 2012 versus a year earlier. Analyst expectations are positive over the long term, with a five-year PEG ratio of 0.8, so Caterpillar might be worth checking out if this quarter turns out better.
Boeing trades at a higher trailing P/E than its peers. Even though all of those peers have substantial drawbacks in terms of recent performance or exposure to government spending decisions, we still think that the defense-oriented companies might be value (or income) plays. In Boeing’s case we would want to wait for further information and see how its operating income and tax rates play out.
Disclosure: I own no shares of any stocks mentioned in this article.
