Boeing Co (NYSE:BA) flies very high. With a tax cut, a dividend increase and a long order backlog, Boeing stock has doubled in the last year alone.
Boeing serves as the exclusive aircraft provider for Southwest Airlines Co (NYSE:LUV) and RyanAir Holdings plc (ADR) (NASDAQ:RYAAY). As a primary producer of aircraft for many of the other major airlines, Boeing has amassed a years-long backlog of orders. However, high valuations and poor sales growth have left investors with causes for concern in the stock. Given the current valuations, investors should hold off on buying Boeing stock — at least for now.
Boeing Stock Has Enjoyed a Long-Term Uptrend
Boeing stock has enjoyed a continuous uptrend for almost nine years now. Since hitting a low of $31.40 in early 2009, the stock has risen more than tenfold, trading at nearly $320 per share today. Half of that gain occurred in the last year, as the stock traded below $160 at the time. This rate of increase is unusual for a Dow 30 stock, established equities that usually enjoy much slower growth.
Analysts like to compare Boeing against its primary competitor in commercial aircraft, Airbus SE (OTCMKTS:EADSF). Boeing doesn’t compete in the regional jet market dominated by Embraer SA (ADR) (NYSE:ERJ) or Bombadier Inc (OTCMKTS:BDRBF). However, Boeing plays a lesser-known, but important, role in military aircraft. Here, it competes against companies such as Lockheed Martin Corporation (NYSE:LMT) and Northrop Grumman Corporation (NYSE:NOC). In fact, analysts have credited rumors of increased defense spending from the Trump Administration as one reason for the increase in the BA stock price.
Other areas have likely driven stock price growth as well. A recent corporate tax cut, as well as a dividend increase (BA has increased its dividend every year since 2012), are among other reasons cited. The current dividend yield stands at just under 1.8%, an average level for yields in the S&P 500.
Aircraft orders have also remained strong. Boeing delivered a record 763 aircraft in 2017. It also received orders for 912 additional units, leaving Boeing with a seven-year backlog of 5,864 planes.
Because of the Uptrend, Boeing Stock Is Due for a Pullback
Still, what’s good news for current owners may not be helpful to new investors. Revenue has decreased each of the last two years and these decreases have occurred despite a nearly 40% increase in net income from 2016 levels and a doubling of the Boeing stock price, which has boosted the price-to-earnings (PE) ratio to nearly 30.
However, the most interesting statistic is the price-to-book (PB) value. This metric stands at 175! The average PB ratio for the S&P stands at only 2.76. What’s driving this anomaly is $15.5 billion in pension obligations. The balance sheet also shows a combined $62 billion in “other” current and non-current liabilities. Whatever these liabilities are, they place current stockholder equity at just over $1 billion. That figure is unusually low for a company with a $190+ billion market cap.
Still, any significant downturn in the stock should create a good buying opportunity. In addition to the seven-year backlog in aircraft orders, free cash flow only appears to grow. For the first three quarters of 2017, Boeing created over $11.2 billion in free cash flow. The company generated $10.5 billion for all of 2016.
Concluding Thoughts on Boeing Stock
For now, with high levels of free cash flow and a long order backlog, Boeing stock has moved ahead of its valuations and investors should avoid the stock.
Boeing’s strong fundamentals have increased the stock price by over ten times in the last nine years. However, despite record production and stock price increases, revenues have trended downward for the last two years. This situation has sent the PE ratio to a relatively high level.
Pension and other unnamed liabilities have also left Boeing with little stockholder equity. Strong cash flows and order backlogs will keep Boeing busy for several years to come; however, its higher valuation makes Boeing stock a poor buy at this time. Still, if Boeing stock corrects to a lower level, and revenue and profits continue rising, investors should board this high-flying stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.