Shareholders of Boeing (BA) have endured some tough news over the last year, with a contentious and drawn out bidding war for the US Air Force Tanker contract and multiple delays on delivery of the 787 Dreamliner. Some of these issues also dragged down financial results of the Chicago company down as they have missed analysts’ estimates in five of the last seven quarters. However, despite the setbacks, the stock has really taken flight returning 146% over the last twelve months. The tide has turned for Boeing with production of legacy aircraft really picking up and they are now considered the favorite to win the USAF’s tanker contract worth tens of billions of dollars. In addition, today Boeing reported positive initial results from stress tests of 787 wings. It appears that the two projects that have plagued the stock recently, may actually play out the way Boeing had hoped after some rough years.
Value investors who astutely picked up shares of Boeing when they were cheap (and we recommended them: Boeing: Dreamliner Delays Are a Gift) last fall in the high $40-low $50 range, may be wondering what is the appropriate timing to exit the stock. We are not saying that this is the time because Boeing is performing quite well at the moment, but the time may not be far off. Boeing stock will almost certainly get a boost from the
first delivery of the Dreamliner (after five different delays) which today’s test suggests should be within the year. The tanker contract may be settled even sooner, as EADS (EAD) will decide on if it will submit a new bid for the contract in the next few weeks. It would seem logical that Boeing’s stock would continue to climb higher on positive news such as this.
With that said value investors may wonder if the stock is worth the premium price it now commands. At Ockham, we recently downgraded Boeing to Overvalued from Fairly Valued because of the significant price appreciation. There is no doubt that business is improving, but we wonder if the stock has gotten a little ahead of itself. The stock has risen above the consensus price target among 23 Wall Street analysts of $69 per share, and continued higher on Monday.
The stock trades near the high end of its historically normal price-to-cash earnings and price-to-sales ranges. For example, earnings are expected to rebound from last year’s low levels, but the current price-to-cash earnings is actually 18.4x or above the historical range of 10.4x to 17.3x. Price-to-sales per share does not signal such an overbought condition; the historical range is .68x to 1.11x and the current metric stands at .86x fiscal 2010 sales. So, while valuation has become a concern, it is not enough yet for us to recommend selling yet because fundamentals continue to improve. The stock has a lot of momentum right now, and should one of these two big announcements (tanker or Dreamliner) happen in the coming weeks it should benefit shareholders. Many investors would be pleased at the appreciation already achieved in BA, but there is no sense in leaving extra return on the table. If I had a position in BA (I don’t) I would put on a stop loss just in case, but otherwise let it run a little further before ringing the register.
