This Just In: Upgrades and Downgrades

What do you do when a high-profile analyst downgrades the best-known aerospace stock in the world?

Rich Smith
Rich Smith
Dec 18, 2015 at 1:54PM

So it looks like Boeing (NYSE:BA) is going to lose the race to sell the most airplanes to Airbus this year -- for the third straight year. Unfortunately for Boeing shareholders, that's not the only bad news they got this week.

Boeing just got downgraded.

Boeing, going, gone?
As the week wrapped up and Christmas came one day closer, Wall Street delivered an unwelcome package to Boeing investors Friday. Investment megabanker Wells Fargo announced this morning that it's cutting its rating on Boeing from outperform to just market perform.

Explanations for the downgrade vary. Some analysts, for example, are pointing to yesterday's news that Delta Air Lines (NYSE:DAL) is buying a used Boeing 777 (for just $7.7 million), instead of a new Boeing bird. According to naysayers, Delta's announcement proves that demand for new aircraft has peaked -- and sales will soon slump.

Bloomberg news is going so far as to describe the market for new airplanes as "glutted." Even if that's not true, the fact that Delta is trumpeting the availability of cheap used 777s on Twitter suggests that Delta will bargain hard on pricing for any new 777s that Boeing tries to sell it, putting a lid on the prices Boeing can demand.

This seems to be the tack that Wells Fargo is taking. Inability to raise prices, says Wells, is going to be a "headwind" for Boeing going forward, and the analyst warns that Boeing's next round of guidance on fiscal 2016 will likely disappoint shareholders. Investors are taking that warning to heart, with Boeing shares sinking for their second day in response to the downgrade, and now down nearly 5% from Wednesday prices.

But should you be selling Boeing, too?

Let's go to the tape
A boast that 777s are selling for just $7.7 million on the used plane market, pulled off of Delta's CEO's Twitter account, is certainly disturbing -- after all, new 777s go for $277 million and up on Boeing's plane-price page. But it's only anecdotal, and even if true, describes only one Boeing 777 for sale. (Does it come with a sunroof? Was it involved in an accident? Did anyone pull its CarFax report?)

More disturbing would be if we found out that Wells Fargo -- the analyst downgrading Boeing today -- had some incredible record of accuracy when picking aerospace stocks. So let's look into that angle of the story.

Here at Motley Fool CAPS, we've been tracking the performance of Wells Fargo's stock picks since 2006. What we've found is that, although Wells is a fine analyst in many respects, it's just not that great of an aerospace stock analyst. Here, see for yourself:



Wells Fargo Says:

CAPS Says:

Wells Fargo's Picks Beating (Lagging) S&P By:

BE Aerospace



52 points




(15 points)

United Technologies



(17 points)

Over the past nine-plus years, in fact, Wells Fargo has been wrong on its aerospace picks about 40% of the time -- and wrong on Boeing in particular. And while that doesn't prove that Wells Fargo is wrong about Boeing this time, neither does it add much weight to the analyst's negative move on Boeing stock.

Valuing Boeing
Fortunately, even if Wells Fargo doesn't have any special insight into Boeing stock to give us, we as investors aren't at all cast adrift. We can take a good hard look at Boeing for ourselves -- and here's what we find:

Boeing shares currently sell for 17.7 times earnings, or about 5% below the industry average. Growth-wise, the stock is expected to increase earnings at just under 11% annually over the next five years -- which is again somewhat below the growth rate for the industry as a whole, but not greatly so. What's more, much more important that Boeing's GAAP earnings in my view, is the rate at which Boeing is churning out cash earnings as its 787 production rate ramps up, the pace of deliveries increases, and the cash from those 787 sales pours into Boeing's coffers.

Over the past 12 months, this free cash flow to Boeing has surged past $8.7 billion -- more than 55% ahead of the company's reported GAAP income. And with Boeing now valued at just $94 billion and change (thanks largely to Wells Fargo's downgrade), this means that the stock can be had for the low, low valuation of just 10.8 times free cash flow.

The upshot for investors
The way I look at these things, 10.8 times FCF is a fine price to pay for near-11% growth -- and with Boeing paying its shareholders a respectable 2.6% dividend yield on top, I'd even go so far as to call the stock cheap.

Long story short, I disagree with Wells Fargo's negative call on Boeing stock today. I think the stock's a bargain -- and I've got a better record on these things than Wells Fargo does. Check out that record on Motley Fool CAPS, and see.