This Just In: Analyst Bashes Boeing (But Should You Care?)

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.

Boeing's 777X airliner will be a terrific plane. But can it save the stock? Photo: Boeing.

And speaking of the best ...
There's big news afoot at Boeing (BA 0.92%) today, and it's not of the "good" variety. RBC Capital, the Canadian investment bank, announced Wednesday that it is removing its buy-rating from Boeing, and downgrading the stock to "sector perform."

Why? RBC begins its analysis with a list of things that are good about Boeing: "three years of record orders," "production rate increases for the rest of the decade," and a stock that has outperformed the S&P 500 by a good 29 percentage points over the past year. And yet, according to RBC, it's this very strong stock performance that has become Boeing's bane.

With so much good news priced into Boeing's stock already, the analyst sees these shares are fully valued -- and may be capable of rising another 8% to $145, but lacking any catalysts to move the shares higher from there. But is RBC right?

Let's go to the tape
Sad to say, yes, RBC is almost certainly right about Boeing -- and I say this for two good reasons. Let's start with the analyst's record.

Here at Motley Fool CAPS, we've been tracking RBC's performance for nearly eight years now, and its aerospace and defense picks for the past five years. What we've discovered is that RBC is one very fine stock picker. Ranked in the top 10% of analysts we track, RBC is particularly proficient at picking aerospace stocks, where the analyst has gotten 58% of its predictions right over the past half-decade -- and outscored the S&P 500 by a combined 609 percentage points.

A few examples:

Note that Goodrich Corp is now owned by United Technologies (RTX 1.01%) -- also rated four-stars on CAPS -- and not coincidentally, also one of RBC's market-beating picks. We should also point out that RBC was an early fan of Boeing, recommending that investors buy the stock as far back as 2010 -- and beating the market by a good 54 percentage points over that period.

Valuation matters
So right off the bat, we have one good reason to suspect that RBC is right to downgrade Boeing. Now here's a second reason: valuation.

Priced at 23 times trailing earnings, but expected by most analysts to post only about 10.4% average earnings growth over the next five years, Boeing seems a very expensive stock. True, it's not quite as expensive as it looks. S&P Capital IQ data confirm that, with its 787 Dreamliner program finally up and running, and its 737 cash cow business continuing to churn out cash, Boeing generated a whopping $6.7 billion in positive free cash flow over the past 12 months -- a result about 50% better than Boeing's reported "net income" under GAAP.

But even so, this works out to a price to free cash flow ratio of 14.6, which is still more than we'd ordinarily want to pay for a 10%-ish grower like Boeing.

Foolish final thought(s)
Long story short... while I wouldn't go "long" Boeing shares at today's prices, I wouldn't necessarily "short" the stock, either. While 14.6 times free cash flow is a steep price to pay for 10% growth, it's a price made more palatable by Boeing's generous 2.1% dividend payout.

The company even has a chance of juicing its growth rate a bit, if it can respond quickly enough to today's news Persian Gulf airline Emirates has canceled an order for 70 of Airbus' (EADSY -0.53%) big A350 long-haul airliners. Sub-in a few dozen Boeing 777X airplanes for that order, and you could add billions to Boeing's order book, should Boeing succeed in convincing Emirates to make a switch.

Unless and until that happens, though -- based solely on the numbers we see in front of us today -- I have to agree with RBC: Boeing is no longer a buy.