Boeing Co (NYSE:BA) posted first-quarter earnings that picked up where a strong 2014 left off, but nagging risks over weak defense spending and the possibility of a commercial aircraft bubble make BA stock look pretty fairly valued.
Make no mistake: Boeing earnings were robust in a number of ways and exceeded analysts’ expectations. Higher deliveries of commercial aircraft are more than making up for shrinking defense budgets and the continuing pain that’s causing BA in sales of military aircraft.
Investors can also rest assured in the financial outlook, which BA reaffirmed for the full fiscal year.
And yet after rising 18% for the year-to-date, Boeing stock looks like it reflects all of the good news, and then some. If anything, the market might not be giving enough credit to some looming risks.
Deliveries for commercial aircraft are brisk, to be sure, even amid less-than-spectacular global growth. A big part of that boom has been driven by carriers’ desire for more fuel-efficient fleets. But now that energy prices have tumbled, it’s possible some of that demand could dry up.
BA alone has an order backlog of nearly $500 billion. That sets up a possible bubble scenario if a prolonged slump in energy prices or economic weakness leads to a slew of cancellations.
And then there’s the well-known drag of Boeing’s defense segment, which suffered a double-digit percent drop in sales during the quarter.
Big Earnings Beat for BA
For the first quarter, Boeing earnings rose to $1.3 billion, or $1.87 a share, compared with $965 million, or $1.28 a share, a year earlier. On an adjusted basis, which is what analysts typically look at, earnings came to $1.97 a share — beating analysts’ expectations of $1.81 a share.
That’s a big beat.
Revenue growth of 8.2% to $22.1 billion was just shy of Street estimates. Analysts were targeting $22.5 billion in revenue.
The better-than-expected profit was driven by a 14% rise in deliveries of commercial aircraft.
Pulling in the other direction, the company’s defense, space and security segment suffered a drop 12% in first-quarter revenue, led by weakness in military aircraft. Operating profit in the segment slipped 4.5%.
Although there were no nasty surprises in Boeing earnings, there wasn’t anything to justify a higher share price either. Earnings beat estimates, but revenue missed, and the company only affirmed — rather thank raised — its guidance.
Boeing stock looked fully valued heading in to the report, and with nothing to suggest higher earnings on the horizon or a higher multiple, it’s hard to get excited at current levels. After all, BA stock trades at significant premiums to its own five-year averages on both a trailing and forward earnings basis.
Neither is there anything particularly cheap in BA stock by way of its growth outlook. A stock trading at 16.5 times forward earnings with a long-term growth forecast of 12% sounds like a reasonable valuation — not a bargain.
Lastly, analysts’ average price target makes the implied upside in Boeing stock less than 7% over the next 12 months or so. That makes BA stock a hold.
There will be a time to commit fresh capital to Boeing stock, but first-quarter earnings make it clear that we’re not there yet.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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