This Just In: Why Goldman Sachs Downgraded the Boeing Company

Boeing stock rocked by a rare downgrade.

Mar 22, 2014 at 11:00AM

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
In the world of stock upgrades and downgrades, few investment bankers have a more immediately recognizable name than Goldman Sachs. Goldman ranks in the top 15% of investors we track on CAPS, with recommendations that tend to outperform the broad stock market by close to four percentage points per pick.

So when Goldman Sachs issues an unexpected recommendation -- such as this morning's decision to downgrade shares of Boeing (NYSE:BA) to hold -- that tends to get investors' attention. But should it?

Let's go to the tape
After all, despite its famous (infamous?) name, Goldman Sachs' record on stocks is far from perfect. In fact, over the eight years we've been tracking its recommendations, Goldman has actually called more stocks wrong than right and racked up a record of only 48% accuracy on its picks. Among its more grievous errors from the aerospace and defense sector in particular:

 

Goldman Said:

CAPS says (out of 5 stars possible):

Goldman's picks lagging S&P by:

Rockwell Collins

Underperform

****

40 points

Triumph Group

Outperform

*****

28 points

General Dynamics

First Outperform...
then Underperform

***

Wrong both times, Goldman lost 40 points combined


Of course, in the analyst's defense, one stock Goldman Sachs has been right about so far is Boeing. Consistently bullish on the stock since rating it a buy back in May 2010, Goldman's recommendation has outperformed the rest of the stock market by a good 27 percentage points. That lends some reason for confidence that when Goldman tells us today (as related by StreetInsider.com) that "expectations for both the legacy OE cycle and [for Boeing's] 787 program appear elevated," the banker may know what it's talking about.

According to Goldman, the fact that Boeing is now expected to produce "2X the amount of aircraft it did in 2008" makes "incremental growth in the medium-term difficult." Or put another way, Boeing's got a great business going right now -- but that very fact leaves little room for improvement.

Valuation matters
Not all analysts see things this way. On average, consensus estimates call for Boeing to keep growing its profits at 10% annually over the next five years. Problem is, even this respectable rate of growth may not be enough to prove Goldman Sachs wrong this time -- or to make Boeing a stock worth buying.

Priced at 21 times earnings today, Boeing shares appear richly valued for a mere 10% growth rate. Indeed, even with free cash flow running nearly 33% ahead of reported "GAAP" net income, the stock sells for a none-too-cheap price-to-free cash flow ratio of 15. Taking 10% growth as a given, a 15x multiple to FCF is no great bargain.

Long story short, while I don't see Boeing shares as so ridiculously overvalued as to justify "shorting" the stock, Goldman Sachs is right: It's not cheap enough to go "long" on, either. 

Oh, and one more thing
All that being said, Boeing does have a certain appeal to long-term investors. The company is sitting on $5.6 billion in net cash for one thing, and paying out a 2.4% dividend for another. And the simple truth is that, whatever the valuation looks like today, generous dividend-paying stocks like Boeing can make you rich over time. 

While not as sexy as high-flying tech stocks, dividend-paying stocks like Boeing are also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes torock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 414 out of more than 140,000 members. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of General Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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