Dueling Fools
Boeing Going or Gone
June 2, 1999

Boeing Bear Argument
by Bill Barker ([email protected])

Here's what I don't understand. Why do I keep reading so many articles about how the market is so overpriced using Internet or tech companies as examples when these writers have got Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> to kick around instead? Unlike a number of Boeing's employees, I'm no rocket scientist, but aren't we talking about a company that hasn't grown earnings at all during the decade -- yet has, mysteriously, managed to more than double its price over the same time? Is there something that I'm missing here?

Bear with me a moment on this rant, because I'm going to go with a pure valuation argument for this piece, and I'll wait to address the specific present inadequacies with the company's operations in my rebuttal. That is, assuming that Paul has had anything positive to say about Boeing's present operations in his Bull argument. I don't quite know what that might be.

That Boeing has doubled its share price during the decade is, of course, no great accomplishment. After all, whether you're measuring a 1-, 3-, 5-, or 10-year period, Boeing's returns have failed to match the market's. But still, the amazing thing to me is that Boeing's price has risen at all between the beginning of the decade and today. Examine this list of Boeing's earnings per share over the last nine years and looking forward two more:

Year EPS

1991$2.28
1992$2.29
1993$1.64
1994$1.48
1995-$0.04
1996$1.85
1997-$0.18
1998$1.15
1999E$1.84
2000E$1.76

That just ain't pretty.

So that's what an actual or potential Boeing shareholder is confronted with: a company that has a substantial historical record of not growing earnings, and isn't expected to in the near future either. Now, if you're talking about a REIT or a utility company or something that returns most of its earnings to its shareholders in the form of dividends, lack of earnings growth isn't a reason not to invest. But Boeing doesn't provide much of a dividend (currently a 1.2% yield), its earnings aren't consistent or predictable, and the real disaster in looking over this earnings story is that over the last eight years, Boeing has been quadrupling its long-term debt.

So here's a company that now sits on about $6 billion in debt to produce a noticeably smaller amount of earnings per share than it did back in 1991-92 when its long-term debt was around $1.5 billion. Boeing has a balance sheet that is sort of a disaster. Its pretax margins have collapsed down to 3.2% from a level of about 7.5% at the beginning of the decade. Its return on equity figures (though leaning on an awful lot of debt) have also dwindled to 12% from a base of nearly 20% eight years ago. We're looking at a company that literally has no decent numbers anywhere on any of its financial statements.

One would think that investors would be unwilling today to pay even the same price for Boeing that they were back in 1991-92, but apparently that isn't the case. Is the reason for this that the future holds something promising? Nope. The reason is simply that the market has gone up, and for whatever reason, that means that Boeing's stock price was allowed to increase as well. In mid-April, Salomon Smith Barney increased its target "trading range to $34-$43, reflecting the 13% improvement in the market from when we initially established the $30-$38 range." That is, there wasn't anything about the company itself that actually looked any better to the analyst. It was simply that the price had gone past his or her projected "trading range," and the market as a whole had gone up, so, well... then Boeing too ought to be expected to improve its "trading range" as well.

I'm going to pass up the obvious sarcastic comments I could make about such Wise analysis, but I suppose I'm obligated to insert my own view of what the valuation might realistically be for this company.

Let's go ahead and give Boeing the benefit of every doubt. Let's assume consistent earnings of $1.90 a year going forward. As demonstrated above, this is exceedingly generous given Boeing's past performance and the current consensus estimates. (And Boeing's nasty habit of tossing in a money-losing year every third year or so.) I would say an enterprise value of 18x earnings would be about the most that one could realistically pay given what bonds currently offer with far greater stability.

Multiplying $1.90 per share by 18 gives a value of $34.20 per share. Subtracting $4 for the debt above cash that Boeing has, and that leaves you with an approximate value of maybe $30 a share for this company. As I say -- that's about the most generous one could realistically be in valuing this company. Certainly the company wasn't valued nearly this highly back in 1991-92 when it had $4 billion less in debt, actually was earning more per share, and appeared to have some growth prospects.

So today shares of Boeing offer themselves up for sale at nearly 50% more than their most optimistic rational valuation. I don't know about my fellow Fool here, but I think I'll be booking a different flight.

Next: The Bull Responds