This week was not a fun week to own Boeing (NYSE:BA) stock.

Coming off a week in which Boeing, at the Farnborough International Airshow, reported tens of billions of dollars' worth of sales in new airliners, investors had high hopes for another blowout when Boeing reported Q2 earnings Wednesday.

It didn't happen.

Boeing's 777 was a big hit in Farnborough -- but these sales didn't come soon enough to save the quarter. Photo: Boeing.

Instead, Boeing announced a series of numbers that disappointed investors mightily and cost Boeing 2.3% of its market cap Wednesday. Continuing to fall as the weekend approached, Boeing closed out the week down more than 5%. That was $4.7 billion worth of market capitalization -- whoosh! -- gone like the wind.

So what went wrong? The short answer is that "Boeing missed revenue estimates." Going into Wednesday's announcement, analysts had expected Boeing to report earning $2.01 per share on $22.2 billion in sales. Boeing beat the earnings number handily, reporting $2.24 per diluted share.

Unfortunately, Boeing wasn't so lucky on the revenues front, collecting "only" $22 billion in sales. Sure, that sounds like a lot. Boeing CEO Jim McNerney characterized the number as indicative of "strong operating performance across our production programs and services businesses." But $22 billion in sales was one full percentage point below what analysts expected Boeing to report. And in a market that rewards only outperformance, underperformance, no matter how slight, gets punished severely.

Hence the sell-off.

OK, that's the short answer. What's the long answer?
The long answer is that investors appear to have been paying too much attention to the positive press releases coming out of Boeing lately. They forgot the two cardinal rules of investing:

  • First, buy companies that are growing profits rapidly.
  • Second, buy them at prices cheap enough to ensure that, when the company earns a profit, you will make a profit on its stock, too.

That isn't the case at Boeing any longer. Here's why.

Priced at 18.5 times earnings today, Boeing is expected to grow its profits at barely 10.2% annually over the next five years. Add in a 2.2% dividend yield, and you're looking at only a 12.4% total return on Boeing stock. That's not enough to justify the stock's 18.5 earnings P/E ratio -- and it gets worse.

For the past two years, Boeing investors have been consoled themselves with the fact that, if Boeing stock looked expensive when valued on GAAP earnings, at least Boeing was generating a lot of cash -- enough cash, in fact, that its price-to-free cash flow ratio often looked cheaper than the more popular P/E metric that investors focus on.

That's no longer the case today. In fact, the $2 billion in free cash flow that Boeing has generated so far this year is 23% less than the $2.6 billion it claimed as GAAP net income -- and 33% less than the $3 billion in free cash flow that Boeing generated in H1 2013.

Result: Data from S&P Capital IQ clearly show that free cash flow at Boeing is now very nearly equal to reported GAAP earnings. Both figures now come in at $5 billion.

The upshot for investors
For the first time in two years, the gap between Boeing's pricey P/E and its more accurate measure of value -- the price-to-free cash flow ratio -- has closed. With that closure went the possibility of buying Boeing stock for a price cheaper than it looks.

If you've enjoyed the stock's 20% run-up over the past year -- congratulations. Give yourself a pat on the back, and count your winnings (while they're still there). But if you're wondering whether now is the time to take advantage of Boeing stock's recent price weakness, and buy a few shares -- it isn't. The margin of safety is gone, and with it goes the chance of earning future big profits on Boeing stock.