As I continue to journey through the Dow Jones Industrial Average, seeking out the stocks to buy from the venerable index, I’ve come across Boeing Co (NYSE:BA). Immediately, one of the things I like about Boeing stock is that it is part of an effective oligopoly.
There just aren’t that many large capacity passenger airplane manufacturing companies in the world.
You certainly know all of them by number: 737 on through the 787. In fact, Boeing is finally re-tooling the 737 into the 737 Max. Yet that’s not the only thing BA builds that flies. It is a massive supplier of some of the most advanced military aircraft in the world.
You’ve seen these on the news and in the movies, including but not limited to the Apache helicopter, Air Force One, B-1B Lancer, the famous B-52 bomber, the massive C-17 cargo plane, the Chinook helicopter and fighter planes like the F/A-18 Super Hornet, The Growler, F-15 Strike Eagle and plenty of bombs and missiles.
The Backbone of Boeing Stock
Boeing has also been an intrinsic part of our space program, offering satellites, the International Space Station, launch systems and space access vehicles.
Stop and think for a moment, especially next time you’re at an airport, and consider all the logistics and support services that go along with these complex machines. We’re talking support, spare parts, training, maintenance, missile and defense systems, supply chain management, engineering support … it’s mind-boggling if you think about it.
The degree of complexity regarding all these products should honestly make Boeing stock owners proud. BA has been an innovator and leader, and essential to our national defense, our reach into space and our transportation network in the skies.
The primary risk to BA stock is some huge change in demand for commercial aircraft, which is tied to the long-term health of the economy. When the economy was hit with its two biggest shocks — post-9/11 and during the financial crisis — Boeing stock fell 35% and 60% respectively. Both turned out to be perfect buying opportunities for BA stock because people will always need to fly.
Boeing has 27% of its revenues coming from U.S. government contracts, but it seems unlikely that these contracts will be curtailed. There will always be some short-term competitive losses to other contractors, but over time, these even out.
Bottom Line on BA Stock
Nevertheless, revenues climb steadily from year-to-year, up 40% from fiscal year 11 to FY15, with net income up 30%. At present, BA stock is sufficiently financed to pay out about half of its net income as a dividend, presently at 3.15%.
However, there is always the bugaboo regarding valuation in this market. With trailing twelve month net income of about $3.7 billion, Boeing stock trades at a 23x multiple. Analysts project annualized earnings growth of 10.1%.
Add in the dividend of 3.15%, and you get a fair value of 13.4x. I’m willing to give BA stock a 10% premium for its brand name and another 10% for being part of an oligarchy, but that would mean max fair value would be 16x.
For now, then I think BA stock looks overpriced by about 30% to 40%. I think you should consider waiting for a correction that takes Boeing stock down to around $100 or so. That might be a better place to get in and hold the stock for the long-term.
If you hold BA stock now, and have it in your retirement account, you can sell it without triggering capital gains tax. You may want to consider moving it to a cheaper stock that pays a dividend.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
