Boeing is a Strong Buy on the Pullback

Shares of Boeing (BA) fell almost 9% last week following the company’s earnings release. Although Boeing managed to beat the earnings and revenue estimates easily, shares were stung by weak outlook. Boeing reported EPS of $1.60, beating the analysts’ estimates by $0.60. On the revenue front, the company’s sales of $23.6 billion shrunk 3.6% y/y but still managed to surpass the analysts’ estimate by $50 million.

While Boeing’s reported numbers were good, the company’s outlook was weak. Boeing expects core EPS of $8.15-$8.35 in 2016, a lot lower than the consensus of $9.43.
Top-line guidance of $93 billion-$95 billion was also marginally lower than the consensus of $97.2 billion.

Following the announcement, Boeing’s stock fell to 52-week lows, but have since recovered slightly. Boeing is still trading near 52-week lows, and I think investors should use this pullback as an opportunity to buy more stocks.

Guidance may be conservative

The guidance may look troublesome for investors, but Boeing has always been conservative with its guidance and can manage to surpass its own expectations. Since the weak guidance is already priced in Boeing’s current share price, I think investors should use the weakness to buy the stock. Given Boeing’s history of sharing conservative guidance, I think the chances of the company surpassing its own guidance are high.

Cash Flow

Investors should keep a close eye on Boeing’s cash flow instead of EPS as the company incurred huge losses during the initial stages on the production of 787 Dreamliner jets. Boeing produced $9.4 billion of operating cash flow in 2015 and if cash flow stays strong, investors can expect more buybacks and dividends going forward.

Valuation

After the recent pullback, Boeing is trading at 14x trailing earnings and 11.2x forward earnings. The decline in forward P/E ratio indicates that analysts’ are expecting Boeing’s earnings to grow significantly going forward, which is why the stock looks relatively cheap.

Conclusion

Boeing stock represents a wonderful long-term buying opportunity at the current levels. The company has a history of announcing conservative guidance and then revising them upwards multiple times over the course of the year. In addition to that, Boeing’s cash flow is still strong and the management is determined to reward shareholders by buybacks and dividends. Due to these reasons, I think Boeing is trading well below its fair value and is a great stock to hold in the current market. So, I think investors should add Boeing to their portfolio’s following the pullback.
Published on Feb 1, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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