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Boeing was listed on the New York Stock Exchange on 05 September 1934. Boeing common stock forms part of two widely followed indexes: The Dow Jones Industrial Average and the S&P500 (NYSE Euronext, 2012).
One year ago, at the close of trading, Boeing common stock (BA) traded at $79.31. On Friday 4 May 2012, BA common stock traded at the close at $75.84. The one-year return excluding dividends was a loss of 4.3%. If you take into account the dividend paid at $1.68/share, for a 2.1% yield at the closing price one year ago, that loss is reduced to a loss of 2.2%.
Financial highlights include the following financial data: Gross Margins are at 18.2%, Operating Margins are 8.76%, Profit Margins are 5.94% and there is a 2.32% dividend yield. The P/E is 13.19, PEG is 1.21, P/S is 0.78 and P/B is 11.30 (this is very high). The ROE is 91% (very high) (MSN Money, 2012).
The question must be, with financial highlights such as these, why has the common stock essentially been flat for a year? The answers start to reveal themselves when you dig a little deeper into the financial statements.
Revenue growth is marginal at 0.81% from 2007 to 2011. Wall St. favors strong growth companies. Further, the Cost of Goods is rising faster during the same time period at 1.13%. This indicates a weakening margin position, not what an investor wants to see.
Boeing will legitimately use the Percentage of Completion method (POC) for Revenue accounting, which is a little murky to non-accountants. The Cash Flow Statement shows that Cash from Operations is far less than Operating Income that appears on the Income Statement at 0.68. This is an accounting red flag. Essentially when the two-line entries are this far apart, the Operating Income on the Income Statement is being inflated inappropriately. That Boeing uses POC accounting, makes it difficult to truly understand possible issues here.
Further from the 2011 10K filing, it is disclosed that fully 50% of Boeing earnings originate from the Military division of Boeing, Boeing Defense, Space &Security (BDS). This is in my opinion a risk for the following reasons. Both Congress and the Senate formed a Super-committee, the purpose being to reach a solution with regard to government deficits The Super-committee failed to reach any solutions. This means that automatic spending cuts will be implemented. These spending cuts will include military spending and budgets. Boeing potentially could be at risk of reduced military spending under government contracts into the future.
The Government Accountability Office reports that;
“Over the next 5 years, the Department of Defense (DOD) expects to invest almost $343 billion (in the fiscal year 2011 dollars) on the development and procurement of major defense acquisition programs. Defense acquisition programs usually take longer, cost more, and deliver fewer quantities and capabilities than DOD originally planned. For several decades, Congress and DOD have taken steps to improve the acquisition of major weapon systems, yet some program outcomes continue to fall short of what was agreed to when the programs started. With the prospect of slowly growing or flat defense budgets for the foreseeable future, DOD must get better value for its weapon system spending and find ways to deliver needed capability to the warfighter for less than it has spent in the past.” (GAO-11-318SP, 2011, para.1).
Politifact states;
“If I went around this room to every company represented here and I asked you what is the fastest-rising expense in your business over the last decade, I dare say 100 percent of you would say it’s health care costs, and it’s exactly that way in the Department of Defense, which is taking away our ability to spend money on other quality-of-life issues and identify weapons systems to equip our men and women.” (Politifact, 2012, para.6).
In summary, the threat to Boeing, with regard to military contracts and the revenue streams that they provide, is in the near term significant. Until there is greater clarity, Boeing common stock carries significant revenue risk.
References
Government Accountability Office, (2011). Defense: Employing best management practices could help DOD save money on its weapon systems acquisition programs (GAO-11-318SP). Washington D.C., US: Author.
MSN Money: Financials, (2012). Web.
NYSE Euronext: Listings Directory. (2012). Web.
PolitiFact.com: The Truth-o-meter says. (2012). Web.
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