Let’s cover some of the recent developments related to Boeing and ongoing political posturing as it relates to large tech companies. Don’t forget about the 40/40 goal, and be sure to check out the tremendous success rates of the Exclusive publication!
By Brian Nelson, CFA
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The news for Boeing (BA) hasn’t been this bad since the doldrums of the 787 Dreamliner build some years ago now. The 737 narrowbody, the line-up all over the news of late, is the workhorse of the industry, and Boeing’s next generation 737 MAX has been the fastest-selling plane in the aerospace giant’s history. Most countries around the globe, including the US, have now grounded the airplane. The crashes at Lion Air in October 2018 and at Ethiopia Airlines this month are a huge black eye on the platform, but this plane is the short-route, point-to-point option for many airlines.
What we’re saying is that we doubt that many airlines or lessors will cancel the plane in any sort of magnitude, and those that do cancel will only be replaced by new customers that want delivery slots earlier. Boeing has been making planes for a long time, and the company simply will fix the problem, and we applaud regulatory bodies for taking the step to prevent any further loss of life. When it comes to Boeing’s equity valuation or order book, the events of the past several months aren’t that material, even though they are tragic. Our thoughts and prayers go out to the families impacted by both tragedies.
That said, we doubt that Boeing’s outlook will change much for 2019. In late January, management targeted revenue growth in the range of $109.5-111.5 billion, higher than the 2018 mark of $101.1 billion, while GAAP earnings per share was targeted between $21.90 and $22.10 and core earnings per share was targeted between $19.90 and $20.10. That’s significantly better than the $17.85 and $16.01 marks it achieved in 2018. What’s more, operating cash flow is expected to expand nicely, too, to the range of $17-17.5 billion, reflecting a 14% improvement over last year’s mark. The company has only a modest net debt position, too, even including that related to Boeing Capital, which has become a very small part of business these days.
The reality for Boeing’s shareholders is that the company’s equity was getting awfully pricey heading into the events of the past few months, with shares peaking at over $440 earlier earlier this month. The equity has come tumbling down to the high-$370s, but we still don’t think shares are that cheap. The high end of the fair value estimate range has been $404 for some time, so right now, we think shares are priced reasonably, even if they reside above our point fair value estimate of $330. The news regarding the Boeing 737 MAX 8 has been nothing short of tragic, but Boeing has endured just about everything that has been thrown at it from World Wars to the Great Depression to 9/11 and beyond. Boeing, too, will fix the problem it finds itself in.
When it comes to headline noise, however, Boeing’s troubles with its 737 MAX 8 may be just beginning given the scrutiny it will be under in the coming months, but long-term holders of the equity should be less concerned about recent developments than they should be about the underlying valuation of the equity, which we think doesn’t offer much of a bargain. We had added Boeing to the Dividend Growth Newsletter portfolio in January 27, 2017, and we removed it in mid-March of last year, with the stock roughly doubling over that time period and producing a return 5 times that of the S&P 500’s performance. We still like Boeing, but it just doesn’t make the cut to be included in our newsletter portfolios after its tremendous contribution already.
In other news, Senator Elizabeth Warren has announced her intentions to break up some of the largest tech companies, including Facebook (FB), Amazon (AMZN) and Alphabet (GOOG, GOOGL), the parent company of Google. We think the possibility of something like a breakup of these three companies is remote, at best. For one, it’s just too early to handicap the outcome of the 2020 election, and whether momentum with respect to this initiative will ever pick up in the coming years is highly questionable.
Even still, however, we doubt that the long-term impact will be as material as some may believe, even if some anti-trust measures are brought against Facebook, Amazon and Alphabet. One of the companies that we could look to as a historical case study is Microsoft (MSFT), which faced anti-trust pressure due to its Windows dominance in the late 1990s. The company continues to be one of the best-performing equities to this day and has been a solid contributor to the stellar track record of the Dividend Growth Newsletter portfolio.
One of the most underpriced stocks on the market today, Facebook is creeping into the mid-$170s, and following a nice break out of the downtrend, it is now forming a cup-and-handle to boot. That’s just technical speak for “it’s technicals look good, too.” We continue to believe that Facebook is on its way to setting new highs again. Although what has happened to Boeing is rather scary, we think most of the pressure on the stock has been profit-taking on an overpriced equity, not necessarily due to expectations of widespread cancellations in its order book. We’re watching the aerospace supply chain for ideas, but we note that our favorite has already been scooped up by Warren Buffett, himself, in Precision Castparts. We include Berkshire (BRK.B) in the Best Ideas Newsletter portfolio.
That about wraps up my evening note. Don’t forget to watch the three videos if you haven’t already. I would greatly appreciate your review of Value Trap: Theory of Universal Valuation on Amazon (see here), and if you’re looking to add more fantastic ideas to your membership, consider the Exclusive publication (subscribe here). We’ll be releasing the March edition of the Best Ideas Newsletter this Friday. In the meantime, please let me know if you have any questions. Thank you so much for reading! I’m so grateful that you are here.
Don’t forget about the 40/40 Goal. Thank you!
Kind regards,
Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.