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...
Boeing (NYSE:BA) boomed in the first quarter of 2018.
As my Fool.com colleague Adam Levine-Weinberg reports, Boeing grew its revenue 6.5% in the first quarter of this year, with both core earnings per share and free cash flow exploding 68% higher. And this superb performance isn't going unnoticed on Wall Street.
According to a tally by StreetInsider.com, five analysts raised their price targets on Boeing stock after yesterday's earnings report, and only one cut its target. Two separate analysts -- Vertical Research and France's Societe Generale -- went so far as to upgrade Boeing stock to buy.
Here's what you need to know.
BCA is BEA-utiful
What has all these analysts so excited about Boeing stock? The sales and earnings growth were a good start, but not the end of the good news Boeing had to report yesterday. "Deliveries of commercial airplanes surged 9% to 184 last quarter," writes Adam, helping to boost Boeing's operating profit margin at the Boeing commercial airplanes (BCA) division to 11%. It was 6.7% in the year-ago period.
This fact didn't go unnoticed on Wall Street, either. In its upgrade this morning, Societe Generale actually focused on it, arguing that "solid BCA margin progress makes [a] mid-teen margin target look achievable" for Boeing as a whole. Already, Boeing's companywide operating margin has moved up to 10.7% -- and the year is still young.
Over the course of the next eight months or so, Boeing expects to reach its planned production rate of 47 737 airliners per month, up from just 44 last quarter. And even then, Boeing won't be done. Production of 737s could accelerate to as fast as 57 planes per month produced by the end of next year -- a 30% increase over last quarter's production rates, and a big tailwind to cash production.
Speaking of cash...
Cash was a big part of the reason Vertical Research decided to upgrade Boeing stock yesterday as well. It believes "everything went right" for Boeing in Q1, but profits most of all. (In fact, Vertical described Boeing as producing a veritable "wall of cash" as its production rate ramps up.)
This year, Vertical expects Boeing to earn "core" profits of as much as $15.13 per share, increasing more than 20% to $18.23 per share in 2019. Free cash flow at the company, currently 8% of revenue, will reach $12.8 billion by year end, then grow 14% to $14.6 billion in 2019.
So what does this imply for investors in Boeing stock? Here's how I look at it:
Boeing has generated $12.7 billion in positive free cash flow over the last 12 months. Vertical's prediction of $12.8 billion by year end suggests this number should at least hold true through the year, and may even improve a bit. Thus, at a current enterprise value of just over $202 billion, Boeing stock is selling for an EV/FCF ratio of 15.9.
That's not a high price to pay for a company growing its free cash flow at 14%, growing its GAAP profits even faster, and paying a market-average 2% dividend yield. Indeed, if Vertical's predictions pan out and Boeing does generate $14.6 billion in FCF next year -- and continues growing at a similar rate -- then at its recent share price of $340 and change, I'm even inclined to call the stock cheap.
I'd be a buyer at today's prices, and an even more enthusiastic buyer if worries about a trade war with China continue to drag Boeing down.