Boeing Co (NYSE:BA) is a good company, and has been one for many years. It makes good planes, and it pays a good dividend, one that has more than tripled over the last 10 years to $1.42 each quarter. It even increased that dividend during the Great Recession, so it’s durable. When looking for a market top, it helps to seek out excessive valuations on good companies. BA stock is overvalued.
Boeing is the very definition of a good defensive holding. But BA stock is not trading at the price of a defensive holding. It’s trading at 24 times earnings, and has been absolutely on fire during 2017, rising over 68%.
Compared to the rest of the market, this is not excessive. But Boeing offers evidence that the market is becoming a problem.
As of this writing the average price to earnings ratio of the S&P 500 is 25.77, and the Shiller PE ratio, which tries to adjust for economic cycles and inflation, is at 31.53. This is a number exceeded only during the dot-com bubble, and higher than it was in 1929, before the stock market crash.
The BA stock valuation is warning of trouble ahead.
BA Stock Prices Are Too High
Since the 21st century began, PE ratios have jumped out of their previous boundaries, which usually ranged between 10-20 times earnings. They passed 40 during the dot-com bubble and rose to infinity during the Great Recession, when there were no earnings.
As a result, many analysts no longer pay much attention to historic PEs. Critics say the Shiller ratio does not account for retained earnings, but even after making that adjustment the market is expensive.
Again, Boeing is a fine company. But its results have not been special. The company is expecting $2.88 per share of earnings during the current quarter on $24.26 billion of revenue. Earnings would thus fall short of the September quarter, and yearly revenues would fall short of 2016’s $94.57 billion.
By the nature of its business, which is making airplanes and contracting for the military, Boeing is a stable outfit. It brings about 5% of revenue to the net income line, and its long-term debt is just 10% of assets. Cash flow has been rising, but again only by 10% per year.
BA stock, in short, is a sound long-term holding. But over the last year its returns have just taken off, at four times the rate of the S&P 500. It’s priced as a speculative stock and it’s not one.
We Love It
About half the analysts presently following Boeing still say buy it, while the other half say hold it and no one is saying sell.
InvestorPlace writers don’t disagree. The fundamentals are too good to deny, writes Josh Enomoto. True. Don’t be put off by the big run, writes Louis Navillier. Using options, its intrinsic asset value will give your portfolio wings, writes Nicholas Chahine.
While bullish, Chris Tyler sounds a note of caution. Boeing is a “best of breed” stock, and it may be time to be more defensive buying into it. He suggests a “butterfly spread” trade that yields a profit even if the price falls a bit from its November 10 opening of $262 per share.
The Bottom Line
Let me emphasize. Boeing is a good company. It is “best of breed,” a winner in every category where it competes. It is a well-run company that considers carefully before increasing production. The company is a winner.
But bull markets end. Right now, I would rather have cash than Boeing stock. After prices adjust generally, however, I’ll be happy to recommend it to any millennial looking for a good long-term holding.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.