Everyone talks about how successful the FANG stocks have been in this bull market. But the much-less discussed Boeing Co (NYSE:BA) is actually outperforming all of them in 2017. BA stock is up 66% year-to-date. The average gain in the FANG group in 2017 is 44%, with the biggest gainer being Netflix, Inc. (NASDAQ:NFLX) at 61%.
What is behind BA stock’s quiet but huge climb higher? General enthusiasm in the airline and defense markets. An explosion in the experience-first mantra among consumers is having a positive effect on airline traffic. Meanwhile, rising international tensions (see North Korea) are causing many countries to up their defense and military spends. These two tailwinds look likely to continue into the foreseeable future.
All in all, the result is a Boeing stock which has simply rocketed to all-time highs.
But it’s dangerous to chase a stock that taken off like, well, a jet. Throw in the fact that BA stock is trading at a multi-year high valuation — and may be coming under more intense competition in its airline business — and it’s clear to see that BA stock is more risk than reward at these levels.
Increased Competition
The biggest problem with Boeing is that across all major valuation metrics, BA stock trades at a premium to historical levels.
The price-to-earnings multiple now sits just below 23, a 15% premium to the five-year average of 20. The current sales multiple is around 1.7, a 50%-plus premium to the five-year 1.1. BA stock features a 12.3x price/cash flow multiple (15% premium to 10.7) and a 13.9x enterprise value/EBITDA multiple (30%-plus to the five-year 10.5).
Meanwhile, the trailing free cash flow yield sits around 6.7%. The last time the free cash flow yield was this low was back in mid-2015. BA stock moved sideways from that point until the back-half of 2016.
All in all, it’s clear to see that BA stock is trading at a healthy premium. That healthy premium does not price in increased competition in the company’s biggest operating segment.
But that is exactly what Boeing is staring at: bigger competition in its commercial airline segment. Airbus, Boeing’s main rival, recently announced that it would take a majority stake in Bombardier’s C series jet program. Airbus is historically known for making big planes, but the trend in the airline industry is down-sizing. Demand is high for smaller, more fuel efficient planes.
Consequently, Airbus is going small. That adds a big competitor into the mix of a high demand market. Undoubtedly, Boeing’s commercial airline results will be negatively affected.
That is a big deal, considering Boeing’s commercial airplane revenues comprise a majority of the company’s business. Over the past two years, commercial airplane revenues have run around $65 billion while total company revenues have come in at about $95 billion.
Bottom Line on BA Stock
There is no doubt about it. Boeing is back on track.
So is BA stock, almost doubling in the past 12 months, with a 94% gain versus a 20% increase in the S&P 500 Index.
But this rally isn’t worth chasing at these elevated levels. There is nothing wrong with the Boeing growth story. The valuation is simply too full to account for any missteps.
And missteps are bound to happen in the airline and defense spaces. It looks like the first one may already be materializing in the form of enhanced competition from Airbus and Bombardier.
There is no reason to chase BA stock up here. At best, this stock gradually inches sideways over the next several months.
As of this writing, Luke Lango was long NFLX.
