Are you looking to invest in the booming aerospace and defense industry? Then boy, does Seaport Global Securities ever have a deal for you!
This morning, analysts at Seaport initiated coverage of three big names in the aerospace sector. Topping the banker's list of picks is Boeing (NYSE:BA), which Seaport says is a buy at today's price of just $158 and change. Curiously, though, Seaport has little love left for two of Boeing's key suppliers, fuselage and wing maker Spirit Aerosystems (NYSE:SPR) and Rockwell Collins (NYSE:COL), a major provider of avionics (and soon, through its purchase of B/E Aerospace, cabin interiors as well).
Both of these Boeing suppliers Seaport rates "neutral," despite recommending one of their biggest customers. Here are three things you should know about these ratings.
1. No love for Spirit Aerosystems
Responding to Seaport's decision to not recommend either Spirit Aerosystems or Rockwell Collins, investors are selling off both stocks in early Wednesday trading. As of this writing, Spirit shares are down 0.7%, while Rockwell is off 0.5%. But how much sense does that make?
After all, according to Seaport, Spirit Aerosystems stock is likely to rise to $62 in value over the course of the coming year. That's not a whole lot more than the $59 and change that the stock costs today, but it is good enough for a modest 4.7% gain. Throw in another 0.7% in dividend payments, and Seaport at least sees the potential for 5.4% in profits from Spirit stock.
2. Rocky road for Rockwell as well
Similarly, Seaport has assigned a $100 price target to Rockwell Collins stock. While that doesn't imply a whole lot of room to grow from the stock's current price ($94 and change), a move to $100 would at least yield a 6.1% profit from today's price. And Rockwell Collins pays a dividend yield twice as large as Spirit's -- 1.4%. Combined with the projected rise in stock price, that's a pretty respectable 7.5% gain that Seaport is promising.
3. Boeing is best
On the other hand, when you stack these modest single-digit potential profits up against Boeing's prospects, it's clear why Seaport prefers to invest in the big dog.
As reported on TheFly.com today, Seaport sees Boeing stock flying from its current price of about $158 to as high as $180 over the course of the coming year. Thus, the analyst sees a near-14% potential profit from the stock's rise in price alone. Additionally, Boeing just hiked its dividend significantly, and is now yielding 3.6%. Added to the gains in stock price, the analyst is forecasting 17.5% profits for new buyers of Boeing stock -- a significantly better return than it sees from buying either Spirit or Rockwell.
Where will this profit come from? As Seaport explains, Boeing currently boasts a backlog of plane orders to fill that's worth well over $400 billion to the company. The analyst expects Boeing to return a lot of that cash directly to its shareholders through a combination of dividend payments (recently hiked) and also share repurchases (recently replenished with a $14 billion buyback authorization).
Bonus thing: Valuing Boeing
Admittedly, while that all sounds good, some investors may be tempted to ignore Seaport's advice and buy Spirit or Rockwell for the simple fact that their stocks look a whole lot cheaper than Boeing's today.
Currently, Boeing shares fetch 24 times trailing earnings, while Spirit is selling for 15.4 times earnings, and Rockwell just 17.1 times earnings. The key difference here, though, is that analysts who follow this industry see better prospects for Boeing growing the profits it makes faster than its suppliers can. According to data from S&P Global Market Intelligence, Spirit's projected profits growth rate over the next five years is a modest 10%, while Rockwell Collins is expected to grow at 13%. Boeing tops both these numbers with a projected growth rate of 15%.
Additionally, while all three of these firms are generating strong positive free cash flow from the aerospace boom, Boeing's free cash flow stands head and shoulders above that of its suppliers -- $8.15 billion in cash profit generated over just the past 12 months. Valued on this free cash flow, Boeing stock can be said to be selling for less than 12 times free cash flow, which seems a bargain price relative to the stock's 15% growth rate.
Based on that valuation, I'm of the opinion that Seaport Global is ranking these stocks appropriately. While neither Spirit Aerosystems nor Rockwell Collins stocks look particularly expensive, Boeing stock is downright cheap. Of the three, it's the one best worth buying.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 346 out of more than 75,000 rated members.
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