Boeing Co

The Triple Seven, Boeing’s signature air craft is being redesigned (dubbed as the 777X). Today the Wall Street Journal reportedthat the company is “is moving aggressively to cut the cost of its ambitious new design.” The 777 delivers as much as $1.2 b in revenue each month for The Boeing Company (NYSE:BA).

Earlier today the company delivered the first 787 Dreamliner to United Airlines. Meanwhile BA’s primary 777 customer, Emirates, which operates a fleet with 87 aircraft is pressing for the new 777X model.  Cutting costs for the 777X will include reducing the wing-size and using metal rather than carbon fiber wings. However BA has announced that new aircraft will allow for in-flight mobile phone use as well as Wi-Fi connectivity.

CapitalCube analyzes The Boeing Company (NYSE:BA) this week, focusing today on a fundamental analysis of the company. Our analysis, including our fundamental score, is always peer-based. Our peers for BA are: United Technologies Corporation (NYSE:UTX), Honeywell International Inc. (NYSE:HON), Lockheed Martin Corporation (NYSE:LMT), General Dynamics Corporation (NYSE:GD), Raytheon Company (NYSE:RTN), Northrop Grumman Corporation (NYSE:NOC), and Embraer SA (NYSE:ERJ).

Fundamental Analysis_Score_Boeing Co. (BA)_StockFor details on how CapitalCube computes the Fundamental Analysis Score click here.

Relative Valuation

P/B above peers
Boeing Co. currently trades at a higher Price/Book ratio (9.1) than its peer median (2.7).

Valuation Drivers

BA-US’s operating performance is relatively good compared to its peers. The market currently does not expect high earnings growth relative to its peers but seems to expect the company to maintain its relatively high rates of return.

Operations Diagnostic

BA-US’s relative asset efficiency and net profit margins are both around the median level.

Earnings Leverage

Leader
The company’s year-on-year change in revenues and earnings are better than the median among its peer group.

Sustainability of Returns

Questionable
BA-US’s return on assets currently and over the past five years has trailed the peer median and suggests the company might be operationally challenged relative to its peers.

Drivers of Margin

The company’s median gross margin and relatively low pre-tax margin suggest high operating costs versus peers.

Growth Expectations

While BA-US’s revenues in recent years have grown faster than the peer median, the market gives the stock a PE ratio that is around peer median suggesting that the market has some questions about the company’s long-term strategy.

Capital Investment Strategy

Supporting Growth
The company’s level of capital investment seems appropriate to support the company’s growth.

Leverage & Liquidity

Quick and Able
BA-US has the financial and operating capacity to borrow quickly.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.

Share Price Performance

Relative underperformance over the last year and the last month suggest a lagging position.

BA-US’s share price performance of 14.7% for the last 12 months is below its peer median. The 30-day trend in its share price performance of -4.5% is also below the peer median implying that the company’s stock performance is lagging its peers.
Stock price performance over the last month vs. last year charted with respect to peers for Boeing Co. (BA)

Drivers of Valuation: Operations or Expectations?

Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)
The market seems to expect BA-US to maintain its relatively high returns.
BA-US has maintained its relatively high ROE profile from the recent year-end.
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Operations Diagnostic

BA-US’s relative asset efficiency and net profit margins are both around the median level.

BA-US has maintained its median asset turnover and net margin profile from the recent year-end.
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Earnings Leverage

Year-on-year change in revenues and earnings are above the median among its peers.

The company enjoys both better than peer median annual revenue growth of 6.9% and better than peer median earnings growth performance 21.1%. BA-US currently converts every 1% of change in annual revenue into 3.1% of change in annual reported earnings. We view this company as a leader among its peers.
Earnings Leverage Earnings Growth % vs. Revenue Growth % charted with respect to peers for Boeing Co. (BA)

Sustainability of Returns

BA-US’s relative returns suggest that the company has operating challenges.

BA-US’s return on assets is less than its peer median currently (5.7% vs. peer median 7.4%). It has also had less than peer median returns on assets over the past five years (5.0% vs. peer median 6.9%). This performance suggests that the company has persistent operating challenges relative to peers.
Sustainability of Returns or 5 year average ROA% vs. Latest ROA% charted with respect to peers for Boeing Co. (BA)

Drivers of Margin

Relatively low pre-tax margin suggests high operating costs versus peers.

The company’s gross margin of 19.6% is around peer median suggesting that BA-US’s operations do not benefit from any differentiating pricing advantage. In addition, BA-US’s pre-tax margin is less than the peer median (7.7% compared to 9.7%) suggesting relatively high operating costs.
Drivers of Margin or Gross Margin% vs. Pre Tax Margin % charted with respect to Peers for Boeing Co. (BA)
BA-US has maintained its relatively low pre-tax margin profile from the recent year-end.

BA-US’s gross margin is its lowest relative to the last five years and compares to a high of 22.3% in 2010. While its gross margin decreased to 19.6% from 21.3% (in 2011), its peer median increased during this period to 23.8% from 22.9%. Gross margin fell 2.5 percentage points relative to peers.
BA-US’s pre-tax margin is upward trending and is above (but within one standard deviation of) its five-year average pre-tax margin of 6.3%. Compared to 2011, pre-tax margin has remained relatively stable for both the company (7.7%) and the peer median (9.7%).
Chart of Gross Margin %  showing Peer Median (TTM) for Boeing Co. (BA)
Chart of Pre Tax Margin % showing Peer Median (TTM) for Boeing Co. (BA)

Growth Expectations

The market likely has some questions about the company’s long-term strategy.
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Capital Investment Strategy

BA-US’s level of capital investment seems appropriate given the company’s growth.

BA-US’s annualized rate of change in capital of 36.7% over the past three years is higher than its peer median of 4.7%. This investment has generated an above peer median return on capital of 20.1% averaged over the same three years.

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