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Boeing, Going, Gone! How Boeing Lost $4.7 Billion in Just 3 Days

This week was not a fun week to own Boeing (NYSE: BA  ) stock.

Coming off a week in which Boeing, at the Farnborough International Airshow, reported tens of billions of dollars' worth of sales in new airliners, investors had high hopes for another blowout when Boeing reported Q2 earnings Wednesday.

It didn't happen.

Boeing's 777 was a big hit in Farnborough -- but these sales didn't come soon enough to save the quarter. Photo: Boeing.

Instead, Boeing announced a series of numbers that disappointed investors mightily and cost Boeing 2.3% of its market cap Wednesday. Continuing to fall as the weekend approached, Boeing closed out the week down more than 5%. That was $4.7 billion worth of market capitalization -- whoosh! -- gone like the wind.

So what went wrong? The short answer is that "Boeing missed revenue estimates." Going into Wednesday's announcement, analysts had expected Boeing to report earning $2.01 per share on $22.2 billion in sales. Boeing beat the earnings number handily, reporting $2.24 per diluted share.

Unfortunately, Boeing wasn't so lucky on the revenues front, collecting "only" $22 billion in sales. Sure, that sounds like a lot. Boeing CEO Jim McNerney characterized the number as indicative of "strong operating performance across our production programs and services businesses." But $22 billion in sales was one full percentage point below what analysts expected Boeing to report. And in a market that rewards only outperformance, underperformance, no matter how slight, gets punished severely.

Hence the sell-off.

OK, that's the short answer. What's the long answer?
The long answer is that investors appear to have been paying too much attention to the positive press releases coming out of Boeing lately. They forgot the two cardinal rules of investing:

  • First, buy companies that are growing profits rapidly.
  • Second, buy them at prices cheap enough to ensure that, when the company earns a profit, you will make a profit on its stock, too.

That isn't the case at Boeing any longer. Here's why.

Priced at 18.5 times earnings today, Boeing is expected to grow its profits at barely 10.2% annually over the next five years. Add in a 2.2% dividend yield, and you're looking at only a 12.4% total return on Boeing stock. That's not enough to justify the stock's 18.5 earnings P/E ratio -- and it gets worse.

For the past two years, Boeing investors have been consoled themselves with the fact that, if Boeing stock looked expensive when valued on GAAP earnings, at least Boeing was generating a lot of cash -- enough cash, in fact, that its price-to-free cash flow ratio often looked cheaper than the more popular P/E metric that investors focus on.

That's no longer the case today. In fact, the $2 billion in free cash flow that Boeing has generated so far this year is 23% less than the $2.6 billion it claimed as GAAP net income -- and 33% less than the $3 billion in free cash flow that Boeing generated in H1 2013.

Result: Data from S&P Capital IQ clearly show that free cash flow at Boeing is now very nearly equal to reported GAAP earnings. Both figures now come in at $5 billion.

The upshot for investors
For the first time in two years, the gap between Boeing's pricey P/E and its more accurate measure of value -- the price-to-free cash flow ratio -- has closed. With that closure went the possibility of buying Boeing stock for a price cheaper than it looks.

If you've enjoyed the stock's 20% run-up over the past year -- congratulations. Give yourself a pat on the back, and count your winnings (while they're still there). But if you're wondering whether now is the time to take advantage of Boeing stock's recent price weakness, and buy a few shares -- it isn't. The margin of safety is gone, and with it goes the chance of earning future big profits on Boeing stock.


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Read/Post Comments (6) | Recommend This Article (14)

Comments from our Foolish Readers

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 July 27, 2014, at 4:11 PM, nomadd22 wrote:

    You can gauge the intelligence of this article by the opening statement that investors expected better earnings because of the Farnborough orders. I'm pretty sure that most investors, unlike the author, know that Boeing gets paid when the airplanes are delivered, which is from 4 to 7 years after the orders, other than a small deposit. And, expecting to double profits in 7 years isn't exactly disappointing.

  • Report this Comment On July 27, 2014, at 5:09 PM, Oregonboy wrote:

    Great article and I agree. You cannot disappoint your earnings and expect gains in stock. Very simple really.

  • Report this Comment On July 28, 2014, at 10:53 AM, Mathman6577 wrote:

    I'm with nomadd22 on this. Also, some orders announced at the air shows are amended within 2-3 years so anything announced today might not pay off for a decade (or the order might be cancelled). According to Boeing there is a $5T market for new planes over the next 10 years (Airbus says its $4.4T). And that doesn't even include the operational (i.e. air carriers) side of the business. Both Boeing and Airbus (and their suppliers) will of course benefit from the expected growth.

    The stock went down because of short sighted (i.e. live for the moment) investors and analysts who have expectations way too high. And the air shows are not investor conferences --- news from there needs to be tempered.

    Looking at numbers: Estimated annual profit growth of "only" 10.2% over 5 years and a total return of 12.4% is nothing to sneeze at in this market (which is probably around 6% profit growth as a whole right now). The multiple is in-line with the rest of the industry and the stock is not overpriced relative to the overall market.

  • Report this Comment On July 28, 2014, at 8:26 PM, moneyshark92 wrote:

    Isn't the free cash flow down because Boeing has initiated a $10 billion dollar stock repurchase while increasing the dividend? Boeing purchased about $2.4 billion in stock last quarter.

    Isn't this a good thing that Boeing is returning cash to shareholders and reducing the shares outstanding?

  • Report this Comment On July 28, 2014, at 11:40 PM, jspillane wrote:

    also remember that BA had cost overruns with new KC Tanker program that shaved 0.37 cents off of EPS. but maybe more importantly, combine all these comments with the fact that the EX-IM Bank is up for Congressional re-approval in September. in short, the bank provides tax-payer backed loans for foreign purchases of American-made goods. the bank is looking for another 5 yr re-authorization and an increase in lending cap from 140 to 160 billion. what if, in the name of fiscal responsibility, Congress votes it down? will some of the foreign BA orders go down with it? uncertainty breeds price volatility.

  • Report this Comment On July 29, 2014, at 2:31 PM, TMFDitty wrote:

    moneyshark92: Good question. The answer is "no." FCF is simply cash from operations minus capital expenditures. It is not affected by buybacks.

    To the contrary, FCF is where the cash comes from to *pay for* buybacks. So reduced FCF equals reduced ability to fund buybacks.

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Rich Smith

As a defense writer for The Motley Fool, I focus on defense and aerospace stocks. My job? Every day of the week, I'm monitoring the news, figuring out the winners and losers, and tracking down the promising companies for you to invest in. Follow me on Twitter or Facebook for the most important developments in defense & aerospace, and other great stories.

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9/2/2015 4:03 PM
BA $130.63 Up +3.19 +2.50%
The Boeing Company CAPS Rating: ****