Is Boeing a $100 Stock?

One time might have been a fluke. Two times, a coincidence. But three times? There can no longer be room for doubt: Boeing (NYSE: BA  ) is worth $93.92 per share. And if the Dreamliner's arrival gooses sales, it could be worth even more.

Elaborate, please
I'm sorry. Did I jump the gun? After being chewed out for "burying the lede" last time I discussed the aerospace behemoth's valuation, I wanted to get right to the point this time. But seeing as I am predicting a pretty massive, 33% jump in Boeing's stock price ... a few words of explanation are probably called for. So let's begin.

On Thursday of last week, General Dynamics (NYSE: GD  ) announced that it will sell its satellite manufacturing business to Orbital Sciences for $55 million. The sat-unit, which builds birds for everyone from NASA and the U.S. Air Force to tiny sat-imaging company GeoEye, expects to book $50 million in revenues this year. Divided into the purchase price, this works out to a valuation of 1.1 times sales for the unit. And if that valuation sounds familiar, well, it should.

During the Bush Administration-boom years for the industry, defense shops often fetched valuations of 1-times sales and up. With the coming of the presumably dovish Obama Administration and general market tremors, however, a lot of folks apparently decided that valuations needed to come down for these companies. And down they came. At one point, in fact, I had the defense industry clocked at 15 points worth of underperformance relative to the S&P 500.

Bargains abound
But that's good news for investors. Here's why: Although more diversified industrial conglomerates such as General Electric (NYSE: GE  ) and United Technologies (NYSE: UTX  ) still command premiums, as of this writing, it's possible to pick up shares of Boeing, Lockheed Martin (NYSE: LMT  ) , L-3 Communications (NYSE: LLL  ) , and Textron (NYSE: TXT  ) for discounts of anywhere from 30% to 45% off their sales-derived values.

Recent events demonstrate that these discounts are unwarranted, however. It's not just Orbital paying through the nose (and paying over its own price-to-sales (P/S) ratio) to acquire defense and aerospace businesses, you see. To the contrary, in January we saw Argon ST put itself on the block, with experts in the sphere predicting the stock would sell for anywhere from 1 to 2 times sales. A couple months before that, private equity powerhouses KKR and General Atlantic teamed up to take Northrop Grumman's TASC unit private for almost precisely one-time sales.

So everywhere you look, everyone in this industry is paying the pre-2009 valuation for these stocks -- everyone but "the Market," that is.

Time to get busy
On the NYSE and Nasdaq, at least, defense stocks still trade for sizeable discounts to the valuations that savvy acquirers attach to these companies. For example, General Dynamics itself boasts $32 billion in revenues, but a market cap of just over $28.3 billion -- and it's not alone:

Company

Annual Revenues

Market Cap

Potential Profit at 1 Times Sales

Boeing

$68.3 billion

$51.3 billion

33%

L-3

$15.6 billion

$10.7 billion

46%

Lockheed Martin

$45.2 billion

$30.1 billion

46%

Northrop Grumman

$33.8 billion

$19.4 billion

74%

A word of caution
Now, I don't want to assume all defense companies are created equal, and should be set to a default pricing level of 1 times sales. For one, Northrop has traded below its peers even in boom-times on a price-to-sales basis. Likewise, Lockheed spent most of the Bush years at the sub-1 P/S level and has recent pension pains that probably justify some haircut to its selling level.

However, I should note that Boeing's been through this exact same situation in 2001-2003 when its P/S ratio dropped all the way down to a mere .40 on commercial aviation fears. In the aftermath of that swoon, Boeing's P/S multiple charged back before program delays and the Great Recession laid it low. However, with recent large defense contract wins and its new airline programs back on track, a repeat of Boeing's mid-decade performance doesn't seem too far-fetched.

Time to get greedy
If these valuations -- and the potential profits they imply -- set you to salivating, then grab yourself a napkin, and take a deep breath. There may be even bigger bargains out there. Even as we speak, Blackstone (NYSE: BX  ) is raising funds as it cashes out of companies acquired in the last buyout boom. I've little doubt that firms like Goldman Sachs (NYSE: GS  ) , too, are sharpening their pencils and working the valuations on this industry. If we can see the discounts available here, then it stands to reason that the folks who butter their bread with mergers & acquisitions profits see the value here, too.

This is key because, as the (potential) Argon sale and the actual sales of TASC and the GD subsidiary suggest, a catalyst can go a long way toward unlocking the value of these businesses. More specifically: An acquisition is often needed. And while I am sure there are private equity firms out there that could conceivably raise the funds necessary to "take out" $11 billion-L-3 for example, trying to swallow someone like Boeing, whole, could give an acquirer a serious case of indigestion (not to mention problems getting the merger approved by the Feds.)

In contrast, tiny defense players Force Protection and Henry Brothers present themselves to potential acquirers as relatively bite-sized morsels, while slightly larger firms like Oshkosh and Navistar appear relatively digestible at market caps of roughly $3 billion apiece.

Foolish takeaway
Bargains about in the defense industry, and yes, Boeing itself could easily be a $100 stock. But there's no need to limit yourself to the obvious targets. The smaller companies in this sector not only offer bigger discounts to intrinsic value than the defense majors -- they're easier to acquire, and they offer a better chance of seeing their value unlocked.

My advice: Think defense. But also, think small.

General Dynamics is a Motley Fool Inside Value pick, and Orbital Sciences is a Motley Fool Rule Breakers selection, but Fool contributor Rich Smith has no position in any stocks named above. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (12)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2010, at 8:47 PM, baldheadeddork wrote:

    Another reason to think BA is under priced is its position in the commercial aviation market.

    Boeing Commercial Planes is an even bigger part of revenues than Defense, Space and Security combined, and the advantage in the commercial aviation business is shifting decisively in Boeing's direction.

    EADS/Airbus is going to trail the 787 to market by at least three years (I'll be amazed if it's less than four) and the most expensive period of development for the A350 is coming when the company is bleeding cash because of overruns on the A400M and A380. That's going to help, but the big story behind this is that it gives Boeing a cash-rich, multi-year head start in developing the next-generation replacement for the 737 and A320. That's the most important plane either company is going to make for the next twenty or thirty years. If Airbus can't compete they're going to wind up as the AMD of the aerospace business.

  • Report this Comment On March 11, 2010, at 8:59 AM, deemery wrote:

    I like Boeing's aircraft, but since I work in the "military-industrial complex" I've seen a lot of Boeing work, and it sucks. But more than any other company, Boeing has managed to balance defense and commercial work. When the commercial world does a downturn, they go into defense (and argue "global competitiveness")

    I'm looking forward to the Dreamliner, but Boeing is not a company I'd invest in, just because I'm so disgusted with how they've wasted my tax dollars on the projects I've worked on with them.

  • Report this Comment On March 11, 2010, at 11:02 AM, FBEditorial wrote:

    When you look at the prospect of increased 737 and 777 production, I agree, BCA is heavily undervalued.

    http://www.fleetbuzzeditorial.com/2010/03/09/boeings-big-cho...

    Its inevitable that Boeing will up rates, not least because the 737 and 777 command bigger margins than the loss lead deals Airbus thrives on.

  • Report this Comment On March 11, 2010, at 11:37 AM, FBEditorial wrote:

    When you look at the prospect of increased 737 and 777 production, I agree, BCA is heavily undervalued.

    http://www.fleetbuzzeditorial.com/2010/03/09/boeings-big-cho...

    Its inevitable that Boeing will up rates, not least because the 737 and 777 command bigger margins than the loss lead deals Airbus thrives on.

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