Boeing Security Analysis

Reads: 53  | Likes: 1  | Shelves: 1  | Comments: 0

More Details
Status: Finished  |  Genre: Non-Fiction  |  House: Booksie Classic

Submitted: August 22, 2018

A A A | A A A

Submitted: August 22, 2018

A A A

A A A


 

Boeing Security Analysis 2018.

 

6Z8gajJVMGLezHHyvvYGd9hJfl-6LdIp4zOifmvf













 

Security Analysis: The Boeing Company (NYSE: BA)

 

Overview:

 

The Boeing Company is one of the world’s largest aerospace and defense manufacturing firms. It designs, manufactures, and sells commercial jetliners, military aircraft and missile defense, satellites, human space flight, and launch systems and services globally. It operates through four divisions: Commercial Airplanes, Defense, Space and Security, Global Services, and Boeing Capital. Boeing has over 140,000 employees globally and participates in the highly competitive Aerospace/Defense Products and Services industry. The Boeing Company’s mission is to inspire others through aerospace innovation and development. As shown in its mission statement and corporate values, Boeing prides itself on providing top products and services in the aerospace industry. It was established in 1916 and is headquartered in Chicago, Illinois.

 

Large amounts of research and development are used to innovate, develop, and test new and current models of commercial and military aircraft, defense systems, and advanced space product development. As Boeing is in a highly competitive industry, it must constantly be improving and innovating in order to retain its high market share. The nature of this highly competitive market constitutes Boeing’s large research and development expenditures, which were $3.2 billion in fiscal year 2017 alone, roughly 3.4 percent of its revenues. Spending billions of dollars per year on research and development allows The Boeing Company to predict long-term trends in the aerospace and defense markets which allows them to best meet customer needs.

 

In early March 2018, President Trump announced a long-term tariff of 25% on steel imports and 10% on aluminum imports. This is particularly concerning for Boeing because one of its primary inputs in the production of its aircraft is aluminum. This tariff will considerably increase Boeing’s production costs and will ultimately hurt its bottom-line. If these tariffs will be applied in the long-term as planned, Boeing will likely spend time to find a supplier that will be exempt from this tariff. If finding another supplier of aluminum is not feasible, it will use an alternative input, but qualifying an appropriate alternative can take up to a year. The Boeing Company continues to focus on innovation in the aerospace and defense industry and strives to provide superior products and services to its customers. In the commercial jet market, Boeing faces aggressive international competition from Airbus in France, Bombardier in Canada and Embraer from Brazil. In other market segments, their main competitors are Lockheed Martin Corporation, Northrop Grumman Corporation and Spacex. Other non-U.S companies like Airbus Group fortify their presence in the U.S market and partner with U.S defence companies. Both the defense and commercial markets are extremely challenging markets with the same strong competitors.

 

The most interesting document was its proxy statement. Boeing’s management experience is quite impressive beginning with its CEO (Dennis A. Muilenburg) who has worked for Boeing for 33 years. Boeing’s board of directors is comprised of relatively young individuals ranging from early 50s to late 30s but very with a quality background. Most members of the board have worked for Boeing for at least 10 years. There are not many changes in the company’s culture, which has remained the same for years. This allows Boeing to avoid radical changes that might affect the company.

 

During our analysis, a question arose. Who are The Boeing Company’s suppliers and why are they not named in its 10-K? The answer is probably an easy one, they don’t want to scare the investors. Recently, Trump's tariffs on China caused backlash on The Boeing Company. These tariffs will be imposed under Section 301 of the 1974 U.S. Trade Act, focusing on Chinese high-tech goods. Although it’s not part of the 10-K, many reliable sources like Bloomberg and Business Insider mention China as being the main supplier for Boeing. On March 22nd, newer tariffs were imposed and only targeted China. These new tariffs made things go from bad to worse for Boeing. As their imports such as aluminium and steel will be taxed, their exports going to China will be taxed as well. This leaves Airbus a chance to dominate the Asian markets as they have already pending orders from India, Qatar and a portion of the Chinese market. Candidates for new supplies are already waiting and among them are South Korea. President Trump is on the verge of securing his first major trade deal, leveraging the threat of tariffs to gain concessions from South Korea on exports of steel. However, we do not know the exact details of this deal as of April 1, 2018.

The Boeing Company is part of the Industrials Sector in the S&P 500. This sector is cyclical and is comprised of firms that produce goods for manufacturing and construction as well as defense, airline, and machinery companies. Within the Industrials sector, Boeing is part of the Aerospace/Defense Products and Services industry. As of April 1, 2018, The Boeing Company has a market capitalization of $193.14 billion and is regarded a “large-cap” stock because its market capitalization is greater than $30 billion. The Boeing Company is in a cyclical industry and is prone to fluctuations in stock price due to economic conditions. While this is true, Boeing is a large-cap stock, so it will provide investors with increased stability as compared to small-cap stocks because it is a mature firm with consistent growth and high-quality earnings. An investor must use a number of indicators to determine a stock’s inherent risk and volatility. A stock’s beta measures the systematic risk, or unique risk of the stock as compared to the market. The market beta is always 1. Boeing has a beta of 1.63, which shows that it is more volatile than the market. Boeing’s stock price will experience higher price fluctuations in both directions as compared to the market. An investor can also use a company’s P/E (price to earnings) ratio to determine the true value of a company relative to its earnings. Although there is no true P/E value that differentiates value stocks and growth stocks, investors generally agree that stocks with P/E ratios below 15 are value stocks and those above 15 are growth stocks. The Boeing Company has a P/E ratio of 24.47. This means that investors are willing to pay $24.47 for $1 of  Boeing’s earnings. Since this P/E is above 15, it means that investors see growth potential in the company and are willing to pay more per share. Boeing has a dividend yield of 2.14%, which is higher than the Industrial sector average of 1.76%. Its stock price has increased 82.28% over the past year, and has seen a 52-week high at $371.60 per share as compared to the S&P 500, which only increased 10.53% over the same period.

 

Risk and Return:

 

I. Return Over 10 years. (BA, LMT, S&P500)

jC5qE3ZJtbP_YDaiD2f_sBKDo6pIfulwv7nPy17m

 

The spreadsheet above illustrates the different the rate of return of The Boeing Company (BA) , Lockheed Martin (LMT) and the S&P 500 over a period of 10 years from 2008 to 2017. The Boeing Company had its worst year during the recession with -51.12% return in 2008. Over the first 5 years, The Boeing Company had a return of 10.98%, Lockheed Martin had a loss of -1.22%. Boeing regained the market quickly in those five years which was mainly due to Boeing turning into a major domestic and global company serving more than 200 clients from 58 countries. From 2009-2017, Boeing Company Built commercial jets for Singapore, Dubai’s emirates, Air China, Lion Air in Indonesia, Ryanair and averages more than 700 net commercial airplane orders every 300 days. Boeing delivered 763 airplanes in 2017, which set an industry record. The company's 912 net orders represent a bounce back from 768 and 668 in the previous two years. The Boeing Company had other contracts on special command aircrafts, defense and space and security. This extra market boosted Boeing’s growth and it now competes on diverse platforms.

 

 

II. Total Return for The Boeing Company

-b5abF-KB1AgfL9btuMSvsuPi1L45aA3U076nkq_

 

Before we get to the variance and expected return, we needed to calculate the total return of each year for Boeing. We calculated it by taking the beginning of the year prices minus the end of the year price divided by the beginning of the year price. The result is percentage change in the prices which we call total return. The total return will be very useful to calculate the standard deviation.






 

III.  Expected return and Variance for The Boeing Company and Lockheed Martin.

eE0ST8Df2279Y9JEFZKXSo3pP8SrDvineE2aA1jq

 

The chart above depicts the variance, expected return and standard deviation of The Boeing Company and Lockheed Martin Corporation. As expected, The Boeing Company has a better return over 10 years than its rival. We calculated the standard deviations and expected returns of each company in order to compare their coefficient variations later on. Expected return was calculated by multiplying the HPR for Boeing with the probability of the number of years owning Boeing. We added the values for the 10 years and got a 19.11% expected return for The Boeing Company and 13.70% for  Lockheed Martin Corporation. We calculated the variance by squaring the mean return and multiplying it by the probability for each year. To find the standard deviation, we took the square root of the value of variance. This gave us The Boeing Company’s standard deviation, which was 32.23 and Lockheed Martin’s standard deviation of 21.68.

 










 

IV. Coefficient of Variation

Having calculated the expected return and standard deviations for the companies. We can now calculate the coefficient variation and compare both companies.

xcybMdS38aN1KrCf0o4hTIdAeIehEZc4racWlCSE

 

The coefficient variation (CV) for The Boeing Company was 1.69 while the coefficient variation for Lockheed Martin Corporation was 1.58. Boeing clearly has a higher CV making it riskier to invest in, but Boeing’s return compared to Lockheed indicates that some investors would be willing to take the extra risk to get a 5.41 percent extra return. Despite the higher CV, we believe that Boeing is a better investment than Lockheed Martin based on their return over the past 10 years.

 

V.  CAPM.

sM4YHf7aedQxEKxxCikWwI9dIL_FKfXwGw-i7EfR

 

To calculate the required rate of return of The Boeing Company, we used the capital asset pricing model (CAPM). A few assumptions in the CAPM model include the 19.11% return for Boeing, the beta which was 1.63, the 8.08 percent expected return of the S&P 500 and the rate of the 10-year treasury note which is 2.739% (as of March 30th). We proceeded to calculate the required rate of return, which was 11.44%. With our CAPM Model, we can now calculate the company’s Alpha.

 

VI. The Boeing Company Alpha.

iJowFNXfciM_02B8X4Ntsu9t3k2vIML86yfYTCHs

 

Alpha is the abnormal rate of return on a security that exceeds the predicted by an equilibrium model such as CAPM. We calculated the Alpha by taking the expected return for The Boeing Company minus the required rate of return. This calculation generated a positive value of 7.67 percent. A positive Alpha assumes that The Boeing Company is an undervalued stock. Boeing’s P/E ratio is higher than 15 and the Alpha is positive, which again, indicates that it is a growth stock. For the Risk and Return analysis, we can conclude that The Boeing Company is a great stock considering the small difference in the CV compared to Lockheed Martin. Boeing also has an expected return of 19.11%, which is 5.41% more than its competitor.

 

Fundamental Analysis:

 

With the increase in political tension throughout the world, there has been recent demand for military aircraft and weapons. This has provided The Boeing Company with favorable market conditions. The Boeing Company’s Defense, Space & Security (BDS) segment’s main customer has been the United States Department of Defense. Approximately 79% of BDS revenues in the fiscal year 2017 were contributed to purchases from the Department of Defense. Although market conditions are appealing at the time, The Boeing Company expects strong competition from other defense companies, such as Northrop Grumman and Lockheed Martin, to increase in 2018. Additionally, The Boeing Company’s commercial jet aircraft division, which makes up a large portion of its revenues, participates in a highly competitive industry that sees a continual increasing trend in competition every year. As mentioned in a prior section, the enactment of the steel and aluminum tariffs will likely increase the cost of production of The Boeing Company’s products, and will decrease profit margin.

 

The first financial statement analyzed is the balance sheet. Throughout the financial analysis of The Boeing Company, the Lockheed Martin Corporation will be used as a company of comparison as both companies operate in the same industry and can also be considered competitors. We are using the Lockheed Martin Corporation as a comparison to see how Boeing is performing compared to a close competitor in the same industry. The balance sheet for both The Boeing Company and the Lockheed Martin Corporation have been common sized to make a more accurate, relevant comparison. All assets have been taken as a percentage of total assets, and all liabilities and stockholders’ equity have been taken as a percentage of total liabilities and stockholders’ equity. Figure A below shows the common-size balance sheets for the previous three years for both The Boeing Company and the Lockheed Martin Corporation.

 

cJkq_pP0SrtnkqygM3ZD7drsa0qGkqt6b7KudkId

Figure A


 

The first item analyzed on the balance sheet was cash. Boeing has significantly more of its assets in cash than Lockheed Martin does. This shows that Boeing is fairly liquid and can either pay debts or purchase other assets with cash rather than through debt. Conversely, Boeing has almost 50 percent of its assets held up in inventory (48.03 percent in 2017). This harms the liquidity of Boeing because the value of its assets reside in items that have not yet been sold. This is not particularly concerning, but this ultimately makes Boeing less liquid than Lockheed Martin, which only has 9 percent of its assets in inventory. Additionally, holding excess inventory is relatively costly for the company. Next, Boeing has increased its amount of Treasury Stock substantially over the past three years. From 2016 to 2017, Boeing increased Treasury Stock as a percentage of liabilities and stockholders’ equity by seven percent. This means that Boeing is buying back its shares. This is a good sign for investors because it shows that Boeing is investing in itself and thus believes its share price will increase. Additionally, this shows that Boeing’s management decisions will align with investor’s interests. This contributes to a decrease in stockholders’ equity.

J6It7CAfP33x0E1OjQc5QcODHYwYE1oN0SIn4RHX

Figure B

 

The next financial statement analyzed was the common-sized income statement for both Boeing and Lockheed Martin as shown in Figure B. The most important finding in the income statement is the Boeing’s cost of revenue decreased by about four percent of total sales. This is a significant decrease. This decrease in costs shows that the company is becoming more efficient and now realizes a greater percentage of revenues as earnings. This reduction in costs allows both gross profit and operating income to increase substantially as well. Although operating income increased in 2017, which is attributed to the decrease in costs of revenues, Lockheed Martin still consistently has higher operating income than Boeing does. The main reason for this is that Boeing spends roughly three to four percent of its revenues on research and development. As an investor, this is a great sign because it shows the firm’s commitment to constant innovation. Although research and development costs decreased from 2016 to 2017, Boeing still spends a large portion of its revenues on ways to improve its products. This is an even better sign considering that Lockheed Martin contributes none of its earnings to research and development. This provides investors with a good sign that Boeing will continue to have growth and innovation in the long-term.



 

HAkuzExVtuam1lzKnzybZI5j1yIdT_MDFydTa-c7

Figure C


 

Figure C above represents a chart of the ratios for both Boeing and Lockheed Martin. Using these profitability, liquidity, debt, operations, and valuation ratios will allow us to better interpret both Boeing and Lockheed Martin’s financial information. These ratios give further insight into what these companies’ financial statements mean for potential investors.We first analyzed the profitability ratios, primarily net profit margin and gross profit margin. In 2017, Boeing’s net profit margin was 8.777 percent, meaning that they retained 8.777 percent of its revenues as earnings. Conversely, Lockheed Martin’s 2017 net profit margin was 3.922 percent. This shows that in 2017, Boeing was much more profitable than Lockheed Martin was. Boeing’s gross profit margin was 18.552 percent in 2017 while Lockheed Martin’s gross profit margin was 10.868 percent. This simply means that Boeing had a greater difference between revenues as costs than did Lockheed Martin in 2017. This profitability can again be attributed to its significant reduction in costs of revenue in 2017. The next ratios analyzed were Return on Equity (ROE) and Return on Assets (ROA). Return on Equity measures how much profit a firm generates from dollars provided by investors. Over the past three years, ROE has been quite volatile for both Boeing and Lockheed Martin. This stems from the fact that overall stockholders’ equity for both firms is not stable. With an unpredictable and volatile level of stockholders’ equity, ROE values will not be valuable to use in an analysis of two firms. For these two firms ROA will be a better tool of comparison. ROA further measures the profitability of a firm relative to its assets. In 2017, Boeing had an ROA of 8.878 percent while Lockheed Martin had an ROA of 4.303 percent. This shows that Boeing can essentially make more money off less investment than Lockheed Martin. While this holds true for 2017, Lockheed Martin had a higher ROA than Boeing in both 2015 and 2016.

 

The next types of ratios analyzed were the liquidity ratios. First we analyzed both Boeing and Lockheed Martin’s current ratio. The current ratio measures a company’s ability to pay off current liabilities with current assets. In 2017, Boeing had a current ratio of 1.15 while Lockheed Martin had a ratio of 1.38. A ratio greater than 1 is a good sign and shows that a company is liquid enough to pay off current liabilities. Even though Lockheed Martin had a greater ratio than Boeing, Boeing still has had a ratio greater than 1 for the past three years and was greater than Lockheed Martin’s ratios in both 2015 and 2016. A more insightful measurement of liquidity is the quick ratio. This takes inventory out of the liquidity calculation because inventory is less liquid than cash and accounts receivable. Since Boeing has a lot of its assets held up in inventory (48.03 percent in 2017), it inherently has a very low quick ratio. A value greater than 1 shows that a firm can immediately pay off current liabilities should they come due. In 2017, Boeing had a quick ratio of 0.369. This means that if their current liabilities came due, they would have to finance in order to pay them off--they could not pay them off with cash and accounts receivables values alone. In comparison, Lockheed Martin has a quick ratio of 1.027 in 2017. This is slightly concerning for investors because it shows that Boeing is not very liquid and they also have too much of their assets tied up in inventory. They need to find a feasible solution because of the high costs that come with holding too much inventory.

 

We then analyzed the debt ratios. All firms have to finance their operations in some way or another, and debt ratios allow investors to see how well a firm manages its debt. Having debt is positive for a firm because it shows they are financing the business. While this is true, investors want to invest in a firm that is not overly leveraged as compared to its industry or competition because a highly leveraged firm faces a high level of financial risk. We first used the debt-to-equity ratio. This ratio gives insight into how much debt a firm is using to finance operations relative to financing provided by shareholders. In both 2016 and 2017, Boeing had a debt-to-equity ratio greater than 100 percent, 259.0929 percent and 109.5540 percent, respectively. This means that in 2017, Boeing raised $100 from equity investors for every $259.09 it borrowed. This shows that Boeing is heavily leveraged and uses more debt to finance than through equity investors. In 2017, Lockheed Martin had a debt-to-equity ratio of -69.113 percent, which means that they were incredibly leveraged because they had a negative stockholders’ equity. In 2015, Boeing had a lower ratio than Lockheed Martin did. This ratio for both firms was volatile because stockholders’ equity for both firms was volatile. Another insightful debt ratio is the interest coverage ratio. This ratio determines if a firm can pay the interest on its debt given its earnings. The higher the ratio, the less difficulties a firm will have paying its interest. A ratio below 1.5 is a bad sign and can signal poor earnings and potentially too much debt. In 2017, Boeing had an interest coverage ratio of 28.9083, which clearly shows that they have more than enough earnings to pay interest on its debt. While Boeing may be a relatively leveraged firm, they have enough earnings to pay off its interest expense obligations with ease, which is a positive sign for investors. Additionally, Lockheed Martin had an interest coverage ratio of 9.0937. This confirms that Boeing has a thorough level of earnings and can pay off its interest easier than its competition.  

 

Next we analyzed operations ratios for both Boeing and Lockheed Martin. Operations ratios show how efficient a firm’s activities are. We first looked at accounts receivable turnover. This measures how long it takes a firm to collect bills from its customers. A quality accounts receivable ratio varies depending on industry, but generally a firm wants to see a trend of decreasing accounts receivable turnover ratio values. Boeing had an accounts receivable turnover of 35.07 days and 39.23 days in 2016 and 2017, respectively. While accounts receivable turnover increased from 2016 to 2017, Boeing’s ratio is very positive as compared to its competition. Lockheed Martin had an accounts receivable turnover ratio of 60.08 days in 2017. This comparison shows that Boeing is operating more efficiently than Lockheed Martin and can collect bills from its customers in a timely manner. Another valuable operations ratio used to determine the efficiency of a firm is the inventory turnover ratio. This ratio can be used to determine how well a firm can turn inventory into cash. In 2017, Boeing had an inventory turnover ratio of 210.02 days while Lockheed Martin had an inventory turnover ratio of 36.73 days. This is a concerning sign for investors. Since both of these companies are in the Aerospace and Defense industry, they will inherently have higher inventory turnover ratios than most companies because they are selling and selling high-priced, costly goods that take long periods of time to produce. While this is true, Boeing has a significantly greater inventory turnover ratio than Lockheed Martin. This means that Boeing takes over six months to sell a product once it is produced. Boeing’s finished goods thus sit in a warehouse for an extended period of time, which represents high costs. As mentioned earlier, high levels of inventory and a high inventory turnover ratio is a problem and Boeing’s management needs to find a solution to reduce this time in order to cut costs.

 

Lastly, we compared Boeing and Lockheed Martin with their valuation ratios. Valuation ratios help determine the true intrinsic value of a share of stock in a firm. This is vital to potential investors because it helps determine if a stock is under/overvalued relative to its earnings or growth prospects. As mentioned in an earlier section, price-to-earnings (P/E) ratio determines if a stock is relatively cheap or expensive. Boeing has a P/E ratio of 24.05 while Lockheed Martin has a P/E ratio of 48.73. Since both of these ratios are greater than 15, they are considered growth stocks. Additionally, this shows that Boeing is relatively cheap as compared to Lockheed Martin. While a high P/E ratio may make a stock look expensive, the stock can still be a good deal if it has justified growth prospects. The price/earnings-to-growth ratio (PEG) takes predicted growth into account when valuing a stock’s price. To calculate the PEG ratio, one must use a firm’s historical growth. Most analysts agree that a ratio above 1 indicates an overvalued firm as compared to earnings and growth potential. A low PEG ratio indicates an underpriced stock. Boeing has a PEG ratio of 1.75. This means that Boeing is overvalued and their earnings and growth potential do not justify a high share price. While this is true, Lockheed Martin has a PEG ratio of 6.65, which means that it is very overvalued. Since Boeing has a PEG ratio that is significantly lower than Lockheed Martin, its stock price is relatively cheap as compared to its competition.

 

An analysis of Boeing’s cash flow statement is also essential in order to value the firm from a fundamental standpoint. While nothing major stood out, there are a few important points to take from the cash flow statement. First, in 2017, Boeing had operating cash flows of $13.344 billion, which is greater than its 2017 net income of $8.197 billion. This means that Boeing has high-quality earnings. Next, Boeing had capital expenditures of $-1.739 billion in 2017. This number decreased from its 2016 amount. Having a large portion of cash allocated to capital expenditures is a positive sign for investors because it shows that the company is reinvesting in long-term growth. Free cash flow measures the cash flow a firm generates in its normal course of business. It is calculated by subtracting capital expenditures from operating cash flows. In 2017, Boeing had a free cash flow of $11.605 billion, which is larger than Lockheed Martin’s free cash flow of $5.299 billion. This basically represents that Boeing is efficient in generating cash flows after reinvesting in its future.

 

After analyzing The Boeing Company’s financial statements and comparing them to its industry competition Lockheed Martin, we have decided that Boeing is in good financial health. There are no major red flags as shown in their financial statements, but there are a few aspects that Boeing could improve upon. For example, Boeing has a very poor inventory turnover ratio as compared to its competition. Boeing could become more efficient by having inventory sit in a warehouse for long periods of time. Doing so would improve Boeing’s inventory turnover ratio as well as its quick ratio. Overall though, Boeing is in good financial health; its reduction in costs of revenues, high interest coverage ratio, increase in treasury stock, and relatively low P/E ratio are evidence of this. The Boeing Company has a relatively strong balance sheet, income statement, and cash flow statement. In addition, its ratios are positive as compared to Lockheed Martin.

Technical Analysis:

I.50 day MA and 200 day MA (Death Cross and Golden Cross) EVnFtAKDj0j46eaGQwoWwMVlDr54-xTRgH9F38Ui

 

The first analysis we conducted was has a 10 year range from 2008-2017 using weekly candlesticks. This analysis enables us to understand the historical change in prices in Boeing over a long-term period. Developing moving averages can serve to smooth out price action and  filter out much of the noise from price movements. The main advantages of using the Japanese candlesticks is that their offer more information, they are easy to understand and give a psychological portrait of the market (greed, fear, uncertainty etc..). Candlesticks allow an investor to read the changes in the market’s determination of value, which otherwise is known as investor sentiment. As such, candlestick chart provide and extra insight in financial market that traditional bar charts don’t have.

 

Over the past 10 years, Boeing is undergoing a clear upward primary trend. Within the graph, we can see intermediate trends were Boeing is declining. With the moving average (MA) analysis we can figure out how to avoid huge loss like the reversal in 2008 when Boeing fell to 55% less than its original value in November 2007. But let’s take a close look at the MA (moving averages 50 days, 200 days). In January 2008, Boeing was selling at $88.76, as the economy worsened they were minor indicators of further decline as the market. In September 2008, the price of Boeing was around $77. In that same month, the 50 day moving average crossed the 200 day moving average from above indicating bearish sentiment. The death cross occurred and the stock fell to its lowest price in five years. In January 2009, Boeing was selling at an astonishing $42.43. Exactly two years after in January 2011, the 50 day moving average crossed the 200 day moving average from below. This was a major bullish sign for Boeing investors, it ensured a bullish trend, an opportunity to buy. The golden cross occurred in January of 2011, Boeing was selling at $66.51. An investment of 100 shares in Boeing in 2011, is worth roughly $328.00 now without dividends. Using this technical analysis, an investor could have saved around $34.57. They could have sold their shares for $77 in January 2008 and minimized their loss. And later, if they notice the golden cross opportunity, they could make a profit by holding the shares.  

 

II. Bollinger Bands Analysis. ( The Squeeze and expansion)

L1Z3tmkuX6iFKX71OX-_EEVfKY_nHAKaywzmMM5n

The second chart illustrates Bollinger bands over a 10 year period. In this analysis, Bollinger bands are within 2 standard deviations of the middle band and can be calculated using:

Upper Band = Middle band(Main Band) + 2 standard deviations.

Lower Band = Middle band (Main Band) - 2 standard deviations.

First let’s look at the first 3 years on our chart. From 2008 to 2010, we can see a clear volatility in the market and that is what Bollinger bands helps us avoid. As technical analysts, we start to get interested to buy Boeing around the squeeze area were the bands are constricting the moving average. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Contrariwise, the wider apart the bands, the more plausible the chances of a decrease in volatility and the greater the possibility of exiting the trade. However this technique does not act as a trading signal. The bands only give an indication in price volatility but don’t give an indication of when the change may take place or which direction the price is going to move.

Based on our technical analysis, we recommend investors to buy more Boeing shares, mainly for two reasons. First, the 50 day average has moved very high over the past month, leaving the 200 day average below which indicates a future “Death Cross.” However if Boeing keeps growing, the 200 day moving average can keep up with the 50 days MA and the death cross will only happen in the many years or months to come. Second, the Bollinger bands are stretching wider and wider indicating a lot of volatility. Despite the increase in volatility, we don’t know which way the volatility is moving or when it will stabilize. However, technical analysis and techniques are not trading signals. The interpretation of technical signals can vary according to each investor. Our decision for the technical analysis is a Buy rating for The Boeing Company.





 

Valuation:

 

1XZR9mr0jNOxIUR8PJfdzXBc5CLGFh92QKodmQTR


 

Although The Boeing Company has sound fundamentals and technicals, we wanted to find the intrinsic value of the company. To do so, we used the discount cash flow model as shown in the figure above. We also wanted to use the constant perpetual growth model to measure the intrinsic value of the company based on historical dividend growth, but we were not able to. To do this analysis, dividend growth rate must be less than the required rate of return for the calculation to work properly. Boeing’s dividend growth rate was 26.75 percent, which is greater than the required rate of return of 11.44 percent. Using the discounted cash flow model, we had to make a number of assumptions. First, we assumed a long-term growth rate of three percent. We chose three percent as the long-term growth rate because Boeing is a mature company that expects gradual, sustained growth over the long term. Second, as mentioned in the risk and return section, we are using a discount rate of 11.44 that we got from the CAPM formula. Lastly, we expect Boeing to have a short-term growth rate of 19.85 percent. To find this number, we averaged the geometric and arithmetic averages of Boeing’s most recent five-year EPS growth along with two analyst’s predictions of Boeing’s short-term growth. The calculation of the geometric and arithmetic averages are shown in the figure below. Analysts’ growth expectations were 15.3 percent and 18.75 percent.

 

 

8OV_YWa120CBebf_ZM1pZkm51k3bgNFLiXAtkCo6

 

We used the short-term and long-term growth assumptions, the required rate of return, and Boeing’s free cash flow in order to perform calculations. We found the present value of Boeing’s projected future cash flows for the next five years as well as year six and beyond. This calculation gave us the total intrinsic value of Boeing relative to the value of their future cash flows. We then divided this number by the total number of outstanding shares, which gave us an intrinsic value per share of $556.42. Boeing was trading at $327.88 at the market close on Friday, April 1. This means that according to Boeing’s intrinsic value, which is derived from the present value of its predicted future cash flows, Boeing is undervalued and currently trading at a discount of $228.54. The results from the discount cash flow model indicate a buy signal from a valuation standpoint. The most likely explanation for the model to imply this high of an intrinsic value is because of the outstanding EPS growth Boeing experienced in 2017. Because of this growth in 2017, the arithmetic and geometric averages were much higher than the analysts’ growth expectations, which is a reason why the short-term growth is quite high. We do believe that Boeing is currently undervalued, but not to the extent that the discounted cash flow model indicates.

 

Decision:

 

After the completion of the fundamental and technical analysis, as well as the risk and return and valuation of The Boeing Company, we provide The Boeing Company with a buy rating and a 12-month price target of $390. We expect continued growth and innovation over the short-term, which justifies this price target. We believe that this value is fair considering the recent increase in earnings, reduction of costs, and consistent dividend growth. We agree with analyst opinions regarding the company, and this solidifies our Buy rating.

 


 

By: Mugabo Cisse

Ryan Hepburn.

 

10K information on the SEC Website for further details.

https://www.sec.gov/Archives/edgar/data/12927/000001292718000007/a201712dec3110k.htm

 

Rjz7GKnygC3Wyh6fqiPx5YsbBAE1A8VBsrMeEu2X












 


© Copyright 2018 Mugabo Cisse. All rights reserved.

Add Your Comments: