My most recent article about Boeing Co (NYSE:BA) got me back on the BA stock bandwagon; Boeing’s first-quarter earnings are definitely going to keep me there.
Here are three reasons why.
Backlog of Aircraft
Boeing finished the first quarter with a company-wide backlog of $486 billion. Its commercial aircraft segment saw its backlog increase by $4.2 billion to $415.4 billion with more than 5,800 aircraft in the pipeline.
To put that in perspective, Boeing expects to generate 2018 revenue of $97 billion, so we’re talking about almost five years of revenue. That’s a nice problem to have.
Free Cash Flow
As I mentioned April 10, the company is currently generating record operating and free cash flow. Boeing’s Q1 2018 FCF was $2.7 billion, 68% higher than a year earlier.
In fiscal 2017, Boeing had $11.5 billion free cash flow, 85% of which was generated in the second through fourth quarters. If the same thing happens in 2018, Boeing should generate $18.3 billion in free cash flow.
Based on an enterprise value of $201.6 billion ($199.0 billion market cap, plus $12.5 billion debt, less $9.9 billion cash), Boeing has a forward FCF yield of 9.1%, which in my estimation puts it in value territory.
The Effective Tax Rate and Earnings
Thanks to the Trump corporate tax cut, Boeing’s effective tax rate in the first quarter was 12.8%, less than half what it was in the same quarter last year.
The company’s pre-tax earnings in the first quarter were $2.8 billion, 32.4% higher than a year earlier. Because of the change in effective tax rates, Boeing made an additional $388 million, or $0.65 per share it wouldn’t have made last year on the same increase in pre-tax earnings.
In 2018, Boeing expects its effective tax rate to be 16%, about 240 basis points lower than in 2017.
One Thing I Didn’t Like
Boeing repurchased 8.9 million of its shares in the first quarter at an average price of $337.08 per share. That’s about where BA stock is currently trading.
During the three-month period in Q1, BA stock traded between a high of $371.60, a low of $295.40, and a midpoint of $333.50.
I believe good capital allocation involves buying back stock at reasonable prices. If Boeing had repurchased its shares between $310-$320, I’d have been a lot more impressed.
Why’s it a big deal?
The company paid out $3 billion for share repurchases in the first quarter and just $1 billion in dividends. If it’s not going to pay attention to how much it pays for its shares, it ought to increase the dividend instead.
Fortunately, the first quarter is probably an aberration. In 2017, Boeing bought back 46.1 million of its shares at $199.57 per share, 12.2% below the $227.27 midpoint for the year.
Bottom Line on BA Stock
2018 is setting up to be a record year for Boeing.
As I said earlier, its free cash flow yield suggests it’s reasonably priced, if not cheap. While it’s hard to know where the markets are headed, if they go higher, you can be sure Boeing will be leading the charge.
I like BA stock for a long-term hold.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.