Boeing (BA) - Case Study

In answering the question for ourselves whether Boeing is a company worth
consideration as an investment, at the right price, we have used summary and
other figures available from Value Line.

Question 1: Does the company sell brand name products that are likely to
endure?

The answer to this seems quite simple. The major product of the company has
been around for many years, is sold worldwide, and is recognized as a brand
name by airlines and air passengers. In recent years, other passenger brand
names such as Airbus have added competition. The choice of which airplane an
airline buys is a matter of preference, rather than compulsion, and will depend
upon factors such as price, safety, back up and design.

The brand name is good, but so is the competition.

2. Is the business of the company easily understood?

We think so. Its core operation is the design and manufacture of airplanes.

3. Does the company invest in and operate businesses within its area of
expertise?

We would think so. Consideration of the Value Line information suggests that
the company restricts itself to its core operations. We do not see it dabbling
in areas outside its expertise.

4. Does the company have the ability to maintain or increase profitability
by raising prices?

This will totally depend upon the condition of the airline industry and the
extent of the competition at any given time. The near certainty that people
will continue to fly in ever-increasing numbers is dampened by the possibility
of any one of a number of things that could reduce passenger flights –
terrorism, crashes, other and more serious SARS type disease outbreaks.

5. Is the company, looking at both long-term debt, and the current
position, conservatively financed?

a) Long term debt to profitability

The long-term debt of this company in 2002 was 12589 million dollars. The
profit for that year was 2275 million dollars. At this rate, Boeing could wipe
out its long-term debt in 5.53 years. This is a long period.

b) Current ratio

In 2002, Boeing had current assets of 16855 million dollars and current
liabilities of 19810 million dollars, a ratio of debt to assets of .85. This is
lower than would be the desired ratio for industrial companies.

c) Long term debt to equity

In 2002 the long-term debt was 12589 million dollars and shareholders equity
was 7696 million dollars a very high ratio of debt to equity of 1.64. Benjamin
Graham thought that an industrial company should not have a ratio in excess of
1.

6. Does the company show consistently high returns on equity and capital?

The company has shown an average rate of return on equity over the past five
years of 20.12%. In the same period, it showed an average return on capital of
12.02% .The figures indicate that use of debt financing has helped to increase
the company returns on equity.

7. Have the earnings per share and sales per share of the company shown
consistent growth above market averages over a period of at least five years?

The figures for this period are as follows.

Looking at a five-year rolling period, we can calculate, using a hand-held Texas
Instruments BA-35 Solar Calculator, the increase in earnings and sales over the
rolling five-year period 1998-2002. For earnings, this is very high; EPS has
risen from $1.15 to $2.82, a total percentage rise of 145.21 %. Sales have
risen per share from $59.87 to $67.61, a total rise of only 12.92%. The
compound rate of return for earnings is 19.65%, for sales, 2.46%.

The disparity between earnings growth and sales growth suggests that the
company has, for whatever reasons, managed to increase profitability well in
excess of the rise in sales. Any person considering investment in this company
would try and find out why.

8. Hs the company been buying back its shares, and if so, has it bought
them responsibly?

In 1998, the company had common shares outstanding of 937.6 million. In
2002, the figure was 799.6 million. The number of shares on issue has been
substantially reduced, suggesting a share buy back that may be one reason for
increased earnings per share ratios.

9. Has management wisely used retained earnings to increase the rate of
return to shareholders?

The company has the following earnings per share and dividend per share
record over a five-year period.

The company has therefore retained earnings totaling $8.72. In 1998, the
shares reached a low of $29. In 2002, the shares reached a high of $51.10. An
investor who bought at the lowest price in 1998 and still had them at the
highest price in 2002 would have been showing a profit of $22.10. Thus the
shares would have easily slotted into Warren Buffett’s requirement for showing
an increase in market value of a dollar for every dollar retained.

Of course, and this shows Mr. Market as a real factor, an investor who
bought at the 1998 high price of $56.30, and sold at the 2002 low price of
$28.50 would be showing a substantial loss on the investment.

Using the approach of Mary Buffett and David Clark, in The New
Buffettology,  we could calculate the percentage increase in earnings per
share resulting from the retained profits. EPS in 1998 were 1.15, and in 2002
were 2.82, an increase of 1.67. Thus, from the total earnings retained of
$8.72, earnings have increased by a total of $1.67, a percentage increase of
19.15%: above market rates of return.

10. Is the company likely to require large capital sums to ensure
continuing profitability?

Value Line suggests that in the two years following 2002, the company would
be spending about $1.00 a share on capital items. The long-term average is
$1.33, unadjusted for inflation. These figures seem to be a little less than
historical expenditures.

This case study is a demonstration
only and is not intended to influence or persuade visitors to this site to make
any investment decisions; they should make their own decisions, based on their
own research, personal and financial circumstances, and after consultation with
their own financial or investment advisers.