Should You Buy the Dow — Boeing

Today, well look at Boeing (NYSE: BA ), the venerable aviation company now in
its 95th year of business. But Boeing does a lot more than just build planes.
The BMA segment engages in the research, development, production and
modification of manned and unmanned military weapons systems. The N&SS segment
involves the research, development, production and modification of products and
services to assist its customers in transforming their operations through
network integration, information, intelligence and surveillance systems,
communications, architectures and space exploration. The GS&S segment offers
logistics support functions for military platforms and operations. The BCC
segment facilitates, arranges, structures and provides financing solutions for
its commercial airplanes customers. The key driving factors regarding Boeing are
the defense budget and the overall health of the airline industry. Given that
the United States currently is involved in three conflicts, and that the defense
budget has not yet been touched despite arguments over the national debt, the
military component of Boeing's business seems likely to remain robust.
Commercial airlines also are doing just fine, and coming off the recession, the
demand for travel is increasing. That doesn't necessarily mean earnings will
soar, however. This is an expensive business to run, particularly regarding
labor, and there always is the concern that projects such as the Dreamliner will
fall behind, harming margins. There also are legitimate worries that the budget
super-committee will come back with big defense cuts, and those could filter
down to Boeing. Analysts looking out five years on Boeing see annualized
earnings growth at 13.2%, but that includes a 5% earnings decrease in 2011
reflecting those aforementioned issues, with a 25% increase expected in FY 2012.
At a stock price of $63, on FY 2011 earnings of $4.24, the stock presently
trades at a P/E of 15. Lockheed Martin (NYSE: LMT ) and Northrop Grumman (NYSE:
NOC ) are the closest competitors, with P/Es of 9 and 8, respectively. A look at
Boeings financials: The company carries $8.8 billion in cash, as well as $10.3
billion in debt at an interest rate of only 2%. Trailing 12-month cash flow was
$4.2 billion, so the debt service is no problem. The company also had 3.5 times
the amount of free cash flow necessary to pay its 2.7% dividend. So Boeing
appears to be on solid footing financially. There have been three insider
purchases of about 5,000 shares in the past year not a huge endorsement, but
better than nothing. Conclusion Placing a 13 P/E on Boeing, with projected 2015
earnings of $7.56 per share, gives us a price target of $98. Add in reinvested
dividends, and that suggests about a 70% total return. It is arguably overvalued
on this year's earnings, but fairly priced for next year. There's not a lot
of margin for error here, though, and the dividend isn't compelling enough for
retirement accounts. I'd say if you don't have Boeing already in your
portfolios, there are better choices elsewhere. If you do, though: I believe
Boeing is a hold for regular accounts. I believe Boeing is a hold for retirement
accounts. Lawrence Meyers does not own shares of Boeing.