At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
All aboard the Boeing bandwagon
Here we go again. Another month, another analyst boarding the Boeing
As you'll recall, I criticized Goldman's plug at the time, arguing that Boeing's then-42 price-to-earnings ratio looked awfully high relative to the valuations current at other large aerospace players such as United Technologies
But the question this week is: Is Boeing cheap enough to buy now?
Exercises in mental gymnastics
Sadly, I fear it is not. Yesterday, Wall Street banker Sanford Bernstein pointed straight at Boeing's declining share price and declared this the key factor behind its upgrading the stock to "outperform." At $63 per share, Bernstein says this deal is just too tempting to pass up.
Problem is, this week's upgrade has the feel of Bernstein playing a "hunch" that, after a 15% drop, Boeing just has to be cheap enough to buy now. Somehow. I mean, just take a look at some of the statements Bernstein made leading up to its "outperform" conclusion:
- The company still appears to be heading for lower-than-hoped profit margins on its Dreamliner.
- Airbus is considering upgrades to its A320 aircraft, which could dampen demand for Boeing's competing 737.
- Cash flow could "move sharply higher" in 2011... or it could do the exact opposite, trending downwards if suppliers demand large up-front payments for plane parts.
Does any of this sound "bullish" to you? It doesn't to me. But what really worries me about Bernstein's buy rating, is the excessive contortions it puts itself through in an effort to convince itself that Boeing's stock has fallen far enough to be cheap. According to a Barrons.com write-up on the report, Sanford Bernstein posited a target price of $81 for Boeing shares "based on a mix of price-to-EBITDA valuations for the commercial aerospace and defense businesses, adjusting for pension obligations, with a discounted cash flow model folded back in for the cost of the 787 program."
Exactly. You can almost see the analyst muttering, jotting down figures, and trying to "make the numbers work." It's as if Bernstein started out its valuation, hoping to confirm that Boeing's fall had brought it down to an acceptable P/EBITDA number, but discovered instead:
- United Technologies is selling for 7.0 times EBITDA.
- Northrop and Lockheed are in the 5-6x range.
- Key supplier Spirit AeroSystems
(NYSE: SPR)likewise sells for just over 5 times EBITDA.
You can imagine the analyst backtracking, moving farther afield and comparing Boeing to suppliers like Precision Castparts
Curses! Foiled again!
At which point, Sanford Bernstein seems to have just given up trying, and hedged its results with multiple caveats about "pension obligations," 787 effects, and folded (presumably, enough times to resemble an origami swan) "discounted cash flow models."
To me, this whole recommendation has the feel of a cop-out. Rather than explain clearly why Boeing is cheap, the recommendation seems designed to hide the fact that the analyst cannot explain why the stock is cheap. It should be, after a 15% drop. But it isn't.
The solution to this problem, however, is patently obvious. The reason it's so hard to argue that Boeing is cheap, is because with earnings growth still projected at 9% over the long term, the stock is ... not ... cheap. Not at 37 times earnings. Not at the 13-times multiple to "forward" earnings. Not even, astoundingly, at the 10 times multiple to Goldman's guess at what Boeing will earn two years from now. It's really as simple as that.
And what you should do in response is equally simple: Leave the analysts to their at-straws grasping. Meanwhile, the rest of us will wait for better prices. They're already better than they looked last month, and I believe they'll get better still.