Before Buying Boeing Stock, You Must Read This

As a matter of fact, if you're pondering an investment in any defense contractor at all, you should read this article first.

Jun 15, 2014 at 12:15PM

Boeing's F/A-18 Super Hornet is a terrific fighter jet -- but it's not good enough to save Boeing stock. Image source: Wikimedia Commons.

If you are considering making an investment in Boeing (NYSE:BA) stock, stop.

Don't do it.

And now... I'll tell you why.

Write what you know, but buy what is cheap
Here at The Motley Fool, I write about aerospace and defense stocks pretty much every day of the week. I also invest in a lot of companies -- and I'm not half bad at it. According to the up-to-date statistics on file at Motley Fool CAPS, I rank in the top 99.5% of investors we track on the website.

But I'm often asked by readers: If you write so much about defense stocks, why don't you own any?

And the answer is simple: I like reading about defense companies. I like writing about defense companies. But I have absolutely no interest in losing money by investing in defense stocks. And at the prices Mr. Market is charging for defense stocks today, I think these stocks are virtually guaranteed to lose you money over time.

Just one thing
The truth of the matter is that, over the years, I have owned defense stocks -- when the price was right. But here's the thing to remember when you are considering an investment in a defense stock: There is a big difference between a great company, and a great stock. That difference: valuation.

I don't care how good a company is, how bright its prospects, or how big of a Pentagon defense contract it just won. If the price of the stock isn't right, you're going to lose money on it.


Price-to-Earnings Ratio

Price-to-Sales Ratio

Five-Year Projected Growth Rate





General Dynamics




Lockheed Martin




Northrop Grumman




All data courtesy of free financial screening website See up-to-date numbers here.

The fact is, I have little doubt that Boeing is superb plane builder -- of commercial and of military jets alike. With its labor union problems basically solved for the next decade, Boeing should earn beaucoup bucks. But even Boeing will have a hard time earning enough money to justify the 24-times-earnings valuation on its stock. Meanwhile, Boeing's price-to-sales ratio, although enticingly close to the magic one-times-sales number appropriate for valuing defense stocks, isn't quite cheap enough to ring the alarm to buy.

Boeing's International Association of Machinists and Aerospace Workers labor union has agreed not to strike for the next 10 years, while building the 777x airliner. Image source: Boeing.

General Dynamics
General Dynamics is without question America's leading manufacturer of armored vehicles -- from tanks to armored personnel carriers to MRAPs -- and it holds a powerful position in the naval shipbuilding industry as well. General D just announced a multibillion-dollar deal to sell Saudi Arabia literally thousands of new light armored vehicles for its army, a deal that will keep growing revenues for years to come. But even with these sales factored in, analysts see single-digit growth in store for the company -- not fast enough to buy.

General Dynamics' Stryker APC. Source: General Dynamics Land Systems.

Lockheed Martin
Maker of the nation's last manned fighter jet, and holder of a contract worth upwards of $1 trillion dollars to build the F-35 Joint Strike Fighter, Lockheed Martin is the nation's largest pure-play defense contractor. That's a fact that should remain true for decades to come. Lockheed also holds half the contracts for producing the Navy's new Littoral Combat Ship, a good chance of winning work on the new Small Surface Combatant, and a 50% share of the nation's leading space launch company. But at 1.2 times sales, I think the stock has a lot of optimism priced into it already.

Lockheed Martin's F-35 stealth fighter jet had better be the best fighter jet America makes -- because soon it will be the only fighter jet America makes. Image source: Lockheed Martin.

Similarly, I have very high hopes for Northrop Grumman -- as a company. Its significant investments in and years of experience with unmanned aerial vehicles make a force to reckon with in drones, and Northrop Grumman could dominate the drone industry for years to come. But the stock price isn't quite right, and the company's slowest-in-class projected growth rate isn't encouraging, either.

But Northrop Grumman has a robo-helo. How cool is that? Source: Northrop Grumman.

Your Foolish takeaway
I like all of these companies for all of these reasons. But the reason I am ranked in the top one-half of one percent of investors on Motley Fool CAPS is because I've trained myself to look past the headlines -- and focus on valuation.

There are very few defense stocks I'd even consider owning at today's prices. FLIR Systems (NASDAQ:FLIR) is one. Priced at:

  • 33 times earnings
  • But less than 17 times free cash flow
  • Paying a modest 1.1% dividend yield
  • And growing profits at 15% annually

FLIR Systems costs very close to fair valuation, in my opinion. The company's smart investment in Traficon in 2012 expanded its exposure to the civilian market for infrared traffic control, lessening reliance on defense contracts. Last year's savvy purchase of DigitalOptics and its 200 optical patents strengthened FLIR's position even further.

If there's one defense stock out there still cheap enough to own -- one that I might buy myself -- it's this one.

Leaked: Apple's next smart device (warning, it may shock you)
At The Motley Fool, we're big fans of innovative companies like FLIR -- and Apple is one of the best innovators out there. Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Rich Smith owns shares of Apple. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Northrop Grumman. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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