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Should Boeing Shrink Its Stock?

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Faced with the prospects of slowing revenues and declining profits for the foreseeable future, defense contractor Northrop Grumman (NYSE: NOC  ) has announced a plan to boost its earnings dramatically -- by buying back its own stock. But Northrop's hardly the only defense contractor facing a tough spending environment. And this raises the question: Could Boeing (NYSE: BA  ) stock be next in line for a big buyback?

What Northrop did
In a bold move, Northrop upped its planned stock buyback program to $5 billion last week, in effect declaring to Wall Street that even if earnings decline, the company will shrink its share count by 25% and force its per-share earnings to grow.

How? Simple math tells you that if Northrop earns (hypothetically) $1 million and divides this profit among (still hypothetically) 1 million shares, this results in $1 per share in profit. But if you shrink the share count to 750,000 -- on the same $1 million, firmwide profit -- then each remaining share can lay claim to $1.33 of the profits. Presto change-o -- Northrop produces 33% profits growth!

Why Northrop did it
In Northrop's case, this makes sense. Analysts think Northrop's profits will decline by about 2.6% on average over the next five years. But a 33% boost to per-share earnings could cancel out these declines, and even get Northrop growing again.

In the case of Boeing stock, a big buyback could do even more good, turbocharging earnings growth that -- at 14% estimated over the next five years -- already outclasses its rivals in the defense sector:

BA EPS Estimates for Current and Next 3 Fiscal Years Chart

BA EPS Estimates for Current and Next 3 Fiscal Years data by YCharts.

Why Northrop can do it
Northrop's plan to buy back $5 billion in shares over the next three years hinges upon its ability to come up with enough cash to fund the buyback. With $2.45 billion in annual cash profits, it's got more than enough cash for the purpose.

But if Northrop can do a buyback with $2.45 billion in free cash flow, the case for buying back Boeing stock looks even stronger. Again, putting things in perspective here:

BA Free Cash Flow TTM Chart

BA Free Cash Flow TTM data by YCharts.

First things first
If there's one argument to be made against Northrop doing a big buyback, it's that the contractor already has a big slug of debt on its books and probably should think about paying that down. In contrast, Boeing stock looks mighty fine in the debt department. Given its ample cash cushion, Boeing should have no problem putting its prodigious cash flows to work buying back Boeing stock:

Foolish takeaway
As it turns out, of course, Boeing is buying back stock. Back in December, it announced plans to resume stock repurchases that it suspended in 2009. But with only $3.6 billion in the buyback kitty, management's plans for Boeing stock are both smaller absolutely and much smaller in scope relative to the company's market cap, than the buyback that Northrop envisions.

Given Boeing's superior financials, management should jump at the chance to turbocharge growth with a big buyback announcement. It's time to buy back some Boeing stock.

Boeing operates as a major player in a multitrillion-dollar market in which the opportunities and responsibilities are absolutely massive. However, emerging competitors and the company's execution problems have investors wondering whether Boeing will live up to its shareholder responsibilities. In our premium research report on the company, two of The Motley Fool's best minds on industrials have collaborated to provide investors with the key, must-know issues surrounding Boeing. They'll be updating the report as key news hits, so don't miss out -- simply click here now to claim your copy today.


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  • Report this Comment On May 21, 2013, at 1:37 PM, DayOldTaco wrote:

    This is a silly idea. It was tried by Harry Stonecipher in the late 90's and did a lot of harm. As Boeing largest stockholder (because of the Boeing/McD merger) he was willing to push the stock higher and cash out at the long term expence of the Co. Two problems:

    1)It did not do much to push the stock price up.

    2)Money was diverted from new product development. This gave Airbus a foot in the door with new products. The 787 was underfunded by Boeing which contributed to delays and some hardware problems.

    3)Grumman and Lockheed are both companies that failed in the commercial market. Now, I believe they build little or no commecial products. Mostly military. As far as the military is concerned both these companies are too big to fail. They will be kept in businness on matter how badly they screw up (eg F-35). This is not a good model to for Boeing to follow, but it may work for Grumman or Lockheed given there situation.

    Bottom Line: There should be no stock buy unless product development within the company is fully and generiously funded. Boeing should be exploiting the lessons learned and the available cash to develop a couple of new aircraft. This will allow it to reclaim market share from Airbus.

  • Report this Comment On May 22, 2013, at 11:28 AM, TMFDitty wrote:

    And yet, entirely coincidentally, Boeing announces this just a few days after the article publishes:

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