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After a Big Earnings Beat, Boeing Wins a Big Buy Rating: What You Need to Know

By Rich Smith – Jul 27, 2017 at 3:20PM

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The aircraft maker has become a cash machine.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Let's give credit everywhere that it's due. JPMorgan was the first analyst to recommend Boeing (BA 0.66%) stock this month -- but Merrill Lynch is right to do so, too.

Two weeks ago, as you may recall, JPMorgan reversed course on Boeing stock. A Boeing skeptic since way back in February 2016, JPMorgan finally found the cash production story at Boeing just too darn compelling. With earnings on the horizon, JPMorgan bit the $200-plus bullet and advised investors to buy ahead of earnings.

Now, Merrill Lynch is following suit. This morning, just a day after Boeing reported its results, Merrill Lynch announced it is recommending that investors buy Boeing stock. Here are three things you need to know about that.

Boeing 737

Boeing stock looks pretty good in its Q2 quarterly close-up. Image source: Getty Images.

1. What Boeing said

Boeing reported its fiscal Q2 2017 earnings yesterday morning. In stark contrast to the company's year-ago reported loss, Boeing said it earned $2.89 per share in profit last quarter. (Sales, however, were down 8.5%, and missed analyst estimates.)

So far this year, Boeing has earned $5.22 per share, and earnings are accelerating. In updated guidance, Boeing told investors to expect per-share profits of anywhere from $11.10 to $11.30 by year-end, implying that second-half profits will be 115% of what the company earned in H1.

2. The cherry on top

And that's just the start of the good news. In Q2, Boeing announced that it generated $5 billion in operating cash flow. This was 55% more cash than it had churned out in last year's first half. After subtracting $439 million in capital expenditures, it left Boeing with positive free cash flow of $4.5 billion for the quarter -- which was nearly three times the amount of cash profit Boeing had generated in Q1, and puts the company on track to generate some $10.2 billion in free cash flow this year.

3. How Merrill Lynch (and everybody else) reacted

Wall Street responded with applause. At last report, (requires subscription) now tallies a total of five analysts raising their price targets on Boeing stock (to as much as $300 a share) in response to the company's mammoth second quarter. Two Boeing skeptics -- Goldman Sachs and RBC Capital -- have been forced to retract their sell ratings and upgrade Boeing stock to at least neutral. And two analysts -- Merrill Lynch and Credit Suisse -- are now recommending that investors buy Boeing stock.

In Merrill's case, the firm is hiking its price target to $275, saying that it "expects the market to continue to give BA credit for generating cash."

Bonus thing: How much "credit" does Boeing deserve?

With Boeing generating $10.2 billion in cash profit annually on a market capitalization of $145.5 billion -- and only minimal net debt -- Boeing stock currently sells for an enterprise value-to-free-cash-flow ratio of 14.4.

Boeing pays a 2.7% dividend yield on its stock, necessitating only about 11.7% long-term annual profit growth to make its stock look fairly priced (i.e., to give Boeing stock a total anticipated return of 14.4%). In fact, analysts quoted on S&P Global Market Intelligence see the stock growing earnings at closer to 15.5% -- which implies that Boeing stock is not just fairly valued, but actually underpriced, even at today's share price of nearly $240.

Boeing may not remain so cheap for long, however. Credit Suisse, the other analyst upgrading Boeing this morning, says it expects to see Boeing's multiple expand "as cycle concerns diminish with high traffic, and cyclicality abates with a growing service business."

Long story short, 15.5% growth looks doable for Boeing, and assuming the company delivers on those expectations, Boeing stock -- up nearly 76% over the past year alone -- still has room to fly.

Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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