market capitalization of 23.011 billion, Boeing is the nation's largest producer of commercial aircraft and the world's leading aerospace company. It operates in four principal segments: Commercial Airplanes, Military Aircraft and Missile Systems, Space and Communications, and Boeing Capital Corporation. As the world's market for air travel fluctuates with the risk of war, so do Boeing's revenues. However, as the United States moves towards a footing that may include future wars against perceived 'terrorist states,' Boeing stands to gain from military aircraft and weapons production. As such, it intrigues investors as its market is a careful reflection of the front pages of the world's newspapers.
To successfully evaluate Boeing's stock, we must analyze its fundamentals and the performance of comparables, as well as market performance. A projection of future revenues is necessary, along with an estimation of the cost of capital with which Boeing produces. These allow us to provide a Discount Model-based analysis of Boeing's performance based on revenue projections provided by the company. Such metrics may include a traditional two-staged Dividend Discount Model, along with variants on this model including the Free Cash Flows to Financing and Free Cash Flows to Equity. This may provide us with a more adequate understanding of the company's solvency. Boeing competes with Airbus and several other manufacturers of commercial jets, and its P/E and other ratios can be measured against comparables. These models should be familiar as knowledge of them is required for a Chartered Financial Analyst designation. This report will also contain an analysis of the company's Strenghts, Weaknesses, Opportunities, and Threats as these pertain to its revenue stream and borrowing power.
The company cites "technical excellence" and "innovation" as its key strengths. Its research and development firm, Boeing Phantom Works, is responsible for developing new technologies and disseminating them across the company. Boeing is the only large producer of passenger aircraft in the United States, and also produces aircraft for military use. The United States Department of Defense, with a budget of between 350 and 400 billion dollars a year, represents nearly 50% of the world's defense budget, and is the principal customer of Boeing's Military Aircraft and Missile Systems segment.
The market for commercial jets is determined by the volume of passenger air travel. Principal factors that underlie long-term growth in air traffic are sustained economic growth in developed and emerging countries, and political stability. Other notable factors are airline industry profitability, world trade policies, government-to-government relations, environmental constraints, technological changes, and price and other competitive factors. (10-K, 2/03) This market was negatively affected by the recession and September, 11th terrorist attacks and continued to decline through 2002. Boeing's market performance has reflected weaknesses in the airline industry. It should be noted, however, that Boeing enjoys an international market for its aircraft and fluctuations due to political instability are only partially experienced by markets outside the United States
Defense: According to Boeing's latest SEC filing, "Events like nuclear proliferation in North Korea, Operation Enduring Freedom and the continued war on terrorism, highlight the fact that our National Security goals are not rhetorical." It goes on to list military aircraft it produces that may and have been used in armed conflict: "The Company is continuing to invest in business opportunities where it can use its customer knowledge, technical strength and large-scale systems integration capabilities to shape the market. Current major developmental programs include the F/A-22 Raptor, V-22 Osprey tiltrotor aircraft, C-130 Avionics Modernization Program (AMP), the RAH-66 Comanche helicopter and the Unmanned Combat Air Vehicle (UCAV)." The Presidential cabinet is dominated by hawks or 'chicken hawks;' mostly political leaders who have vested interests in international conflict ranging from the reconstruction of countries and structures (Vice President Cheney, former CEO, Halliburton) to oil exploration (National Security Advisor Condoleeza Rice, ExxonMobil Director.) Although according to Boeing, "allocations to DoD procurement are unlikely to increase significantly," there is promise that these leaders will continue to allocate resources for the invasion of small, poorly defended countries.
Counter-terrorism: Boeing is currently working on experimental unmanned aircraft for use in espionage. Given the continued commitment by the governments of the United States and Israel to fighting terrorism, these units should prove effective in the establishment of an unmanned, anti-personnel air force.
Political instability: The Iraq conflict and SARS epidemic have recently hit the airline industry as well. By appointing a new CEO, one of America's largest carriers, American Airlines, barely avoided bankruptcy this month. Many summer flights have so far been cancelled because the war in Iraq was expected to last longer. Concerns over pilot safety recently prompted many airlines to train their pilots to use handguns.
The SARS Epidemic: According to Byron Callan of Merrill Lynch, the potential impact of SARS would extend beyond civil aircraft demand for airlines serving Asia. "If SARS proves to be a more significant factor affecting the U.S. And other international economies, its ramifications could include far higher U.S. federal budget deficits and weaker corporate profits. Higher budget deficits could negatively impact outyear U.S. defense spending projections, which in turn could impact defense company earnings growth rates and valuations."
Any company that wishes to experience growth must regularly finance throught debt. This is because debt allows a company to invest in Net Present Value-positive projects. The company has 15.008 million in debt. This debt ranges in interest payments from 0% to 8.750% Most of the debt seems to be in the 6%-7.5% range, and has various expiration dates lasting until 2031. According to the compay's 10-Q, it has $4,500 currently available under credit line agreements with a group of commercial banks.
According to Business Week, on May 15, 2003, Standard & Poor's Ratings Services lowered Boeing's ratings, including lowering the long-term corporate credit rating to 'A' from 'A+', as well as on its subsidiary Boeing Capital. Combined rated debt for both entities is about $14 billion. A corporate debt rating of A implies that the company may borrow at approximately 5.99% interest in today's market. We will assume that this is the rate of debt financing when we calculate the Weighted Average cost of capital. Boeing's credit protection measures, not including obligations to pension funds and retirement engineers, (at Dec. 31, 2002), are strong for the rating. Standard & Poor. Some estimates debt-funding in expenses expected to become about 75% in 2003.
Although Business week is expected to improve its revenues over time, the credit profile reveals the fears of investors that consumer Airlines are frightening investors from Boeing. Business Week states that "when adjusted for the underfunded postretirement liabilities, "book equity is largely eliminated, employing Standard & Poor's current methodology, with a significant adverse impact on other credit measures." (Business Week, 5/15/03.) Moreover, the question of pension funding could become a legal issue as well as a material issue of cash in future years.
Regardless, Standard & Poor's expects that Boeing's cash flow will remain energized and sufficiently covering operating needs, sizable R&D outlays, pension contributions (discretionary in 2003 and about $1 billion required in 2004), payments for benefits other than pensions ($440 million in 2002), dividends (about $575 million), and customer financing requirements. Free cash flow is expected to grow. It will be $2.0 billion-$2.5 billion in 2003 and over $2.5 billion in 2004, net of pension contributions. Businessweek concludes that "The very challenging operating environment in commercial aerospace and concern about the sizable underfunded postretirement liabilities should be mitigated to a significant degree by improved growth prospects for Boeing's defense operations, substantial cash generation, and good liquidity." (Business Week, 5/15/03.)
Of the Analysts covering Boeing, 5 rate it as a buy, 3 as a strong buy, 11 as a hold, and ony one as a sell (Yahoo Finance.) On a scale of 1-5 where 1 is a Strong Buy and 5 a strong sell, Boeing is currently rated a 2.7, placing it between buy and hold. Its industry (Aerospace and Defense) is rated at a 2.31, its sector (Capital Goods) at a 2.65, and the WSJ mean is at a 2.48, whereas the S&P's mean is at 2.58. This indicates that investor's expectations of Boeing is that it is not as worth buying as other simmilar companies.
Based on the assumtion that the S&P 500 reflects the market rate of return, Boeing's Beta is.66. The Beta of its industry (Aerospace and Defense) is.47 and that of its sector is.67. As with the beta of each, Boeing is performing in line with its industry rather than that of its sector. Its P/E ratio is also in line with that of its sector, reflecting that Boeing is considered priced more simmilarly to other companies that produce capital goods rather than industries in the aerospace sector. This indicates that it is a better buy, but may also indicate that Boeing's sector is growing at a faster rate. The P/E ratio of S&P is considerably higher, which may indicate that the S&P has more opportunities for growth than Boeing.