Boeing May Still Be Undervalued After Today's Rally

Aerospace & Defense company Boeing is standing out today, surging to $219.69 and marking a 3.7% change. In comparison the S&P 500 moved only 1.0%. BA is -6.69% below its average analyst target price of $235.43, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Boeing shares have outperformed the S&P 500 by 52.0%, with a price change of 58.5%.

The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems, and services worldwide. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.

Boeing does not release its trailing 12 month P/E ratio since its earnings per share of $-7.08 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for BA of -31.0. Based on the company's positive earnings guidance of $5.34, the stock has a forward P/E ratio of 41.1.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the industrials sector has an average P/E ratio of 20.49, and the average for the S&P 500 is 15.97.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Boeing's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -1.6. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing BA's growth potential .

To better understand the strength of Boeing's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 66,608,000 7,039,000 -5.31 2.39
2021-12-31 62,286,000 6,406,000 -5.44 75.63
2020-12-31 58,158,000 7,293,000 -22.32 -541.38
2019-12-31 76,559,000 7,128,000 -3.48 n/a
  • Average operating margins: -9.1 %
  • Average operating margins growth rate: -11.1 %
  • Coefficient of variability (lower numbers indicate less volatility): 96.7 %

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Boeing's last four annual reports, we are able to obtain the following rundown of its free cash flow:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 3,512,000 -1,222,000 2,290,000 152.09
2021-12-31 -3,416,000 -980,000 -4,396,000 77.7
2020-12-31 -18,410,000 -1,303,000 -19,713,000 -347.31
2019-12-31 -2,446,000 -1,961,000 -4,407,000 n/a
  • Average free cash flow: $-6556500000.0
  • Average free cash flown growth rate: 11.0 %
  • Coefficient of variability (the lower the better): 142.2 %

Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, BA is in a position to do either -- which can encourage more investors to place their capital in the company.

With a negative P/E ratio, no publishedP/B ratio, and negative and highly variable cash flows with an upwards trend, we can conclude that Boeing is probably overvalued at current prices. The stock presents poor growth indicators because of its consistently negative margins with a negative growth trend, and a negative PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.