What's the right price for Boeing (NYSE: BA)?
Examining the question a couple of weeks back, we looked at Orbital Sciences' (NYSE: ORB) agreement to buy General Dynamics' (NYSE: GD) satellite division, KKR's purchase of TASC from Northrop Grumman (NYSE: NOC), and Argon ST's rumored self-sale. All three transactions were valued at least at one times revenue, which, if applied to Boeing, suggested the company should be worth $100 a share.
But today, yet another M&A aerospace deal is throwing doubt upon this valuation. It's suggesting that far from being undervalued, Boeing may be overpriced -- and the shares could fall as low as $50.
Triumph and tragedy
The news broke yesterday: Triumph Group (NYSE: TGI) has agreed to purchase Vought Aircraft from Carlyle Group for the princely sum of $525 million in cash and $460 million in issued stock ($985 million, total). Stacked up against the $1.9 billion in revenue that Vought brought in last year, the price suggests Triumph is paying just over 0.5 times sales for Vought -- a far cry from "one times sales."
If this is the correct price for aerospace companies, therefore, the implication is that Boeing could be worth not the $100 I posited two weeks ago, or the $73 its shares command today, but a measly 50 bucks. (By the same token, fellow aerospace supplier companies like United Tech (NYSE: UTX) and General Electric (NYSE: GE) could be even more overvalued.)
Horrors!
Scary prospect, huh? Here's why it's wrong. There are at least two details you need to keep in mind when considering the implications of the Vought acquisition. First, $985 million is just the start of Triumph's obligations in acquiring Vought. The company brings with it a $455 million slug of debt, which, if considered part of the price Triumph is paying, would raise the price-to-sales ratio to about 0.76. Perhaps not coincidentally, if you apply this valuation to Boeing's market cap, minus cash, plus debt, you wind up with a valuation almost precisely where Boeing sits today -- $52.8 billion.
And that's not all. Consider how the market reacted to yesterday's news. No sooner had investors crunched the numbers, than they concluded that Triumph just got the deal of a lifetime. Triumph shares leapt and haven't looked back since -- up nearly 13% as of this writing.
Foolish takeaway
What's the upshot of all these numbers? Worst case, Boeing is fairly priced today. Its valuation based on enterprise value almost precisely mirrors the price Triumph bid for Vought. And in the best (and I'd argue the more likely) case, based on how investors reacted to the price Triumph paid, I'd say Boeing, too, still has room to run.
And yet, Boeing's stock has already more than doubled over the past year. How do you know when the train has left the station and it's too late to buy? Here's how.
