It's not always easy owning Boeing (NYSE:BA) stock.
A true giant of global industry, Boeing is arguably the biggest aerospace and defense stock on the planet. With $88.4 billion in annual sales, and $5 billion in annual profits, you'd think Boeing stock might offer stable, dependable -- even uneventful profits for investors. But in fact, it's done anything but.
In 2012, for example, Boeing shares lagged the rest of the S&P 500 badly, rising 5%, but underperforming "the market" by 10 percentage points. In 2013, management turned things around, and Boeing stock surged 77%, easily outperforming the index. Today, as we approach the two-thirds point in 2014, Boeing is down 7% against an 8% rise in the S&P.
What goes up must come down -- and then go up again, then down again, then...
In short, Boeing stock has turned out to be surprisingly volatile for a large cap. But that's not necessarily a bad thing for investors. To the contrary, the more volatile Boeing's swings, the more chances we have to sell it when it's overvalued -- then buy it back again when Boeing is underpriced.
So which is it today? Is Boeing overvalued at its current price of more than $125 a share? Or is Boeing cheap?
Priced at 18.4 times earnings today, and 15.6 times forward earnings (according to S&P Capital IQ data), Boeing stock sells for a slight premium to other stocks in the Aerospace and Defense industry, where 14.7 is the more usual forward P/E. Given Boeing's strong competitive position, however, its rock-solid balance sheet boasting net cash after debt, and the robust free cash flows it generates, a small premium is probably justified. Boeing is, after all, one-half of a global duopoly of large airplane manufacturers. (Airbus (NASDAQOTH:EADSY) is the other half.)
That said, just saying that Boeing isn't unreasonably priced relative to other aerospace and defense manufacturers doesn't mean it's a safe stock to buy. It doesn't mean that the stocks we're comparing Boeing to aren't expensive in the first place -- and it doesn't mean that Boeing isn't overpriced in its own right. So how do we figure out this part of the Boeing valuation picture?
The big picture
Historically, aerospace and defense stocks in the U.S. tend to sell for valuations of roughly 1x sales. (That's not a hard-and-fast rule -- just something I've picked up on from following this industry during the past decade or so). Fast growers, which are projected to grow at better than 10% annually, tend to fetch somewhat more than 1x sales. Strong profits producers -- greater than a 10% net profit margin -- likewise receive higher valuations.
But by and large, 1x annual sales is usually a fair price to pay for an aerospace and defense industry company like Boeing. And how much does the industry sell for today, you ask?
Oh, about 1.6 times sales.
Focusing in on Boeing
While far from dispositive, this does appear to suggest that aerospace and defense companies, as a whole, are selling for more than they're worth today. The fact that Boeing costs even more than the average, when valued on P/E, therefore seems a strike against Boeing.
But that's just the thing: Boeing costs more than the average aerospace and defense contractor when valued on P/E. But when valued on sales, Boeing currently sells for a price-to-sales ratio of 1.0 -- as in, almost precisely on-the-dot the "normal" price for a stock like Boeing.
There are caveats to this analysis, too, of course. Notably, Boeing currently sports a below-average net profit margin of just 5.7%. There's also the fact that the company's long-term projected earnings growth rate is only 10%, while its revenue growth is stuck in neutral, and its defense business appears to be actually shrinking. If that's the way things play out, then we could see Boeing's price-to-sales ratio rise above the magic "1.0 mark" as revenues decline in future years.
When all's said and done, right now, I think the valuation on Boeing stock looks at least fair -- and maybe even cheaper than the stock deserves, for a company of this caliber. I'm not sure I'd buy it until the discount to fair value becomes more clear-cut -- but I certainly see no need to sell it.