Market Cap (USD Mil) 94,695
52-Week High (USD) 144.57
52-Week Low (USD) 83.91
52-Week Total Return % 52.5
YTD Total Return % -6.1
Last Fiscal Year End 31 Dec 2013
5-Yr Forward Revenue CAGR % 5.8
5-Yr Forward EPS CAGR % 8.2
Price/Fair Value 1.06
2012 2013
2014(E) 2015(E)Price/Earnings 12.8 19.3 17.9 15.6
EV/EBITDA 6.6 11.5 9.8 8.8
EV/EBIT 8.5 14.7 12.7 11.2
Free Cash Flow Yield % 10.4 6.0 7.9 5.6
Dividend Yield % 2.3 1.4 2.3 2.4
2012 2013
2014(E) 2015(E)Revenue 81,698 86,623 90,331 98,227
Revenue YoY % 18.9 6.0 4.3 8.7
EBIT 6,311 6,562 6,991 7,920
EBIT YoY % 8.0 4.0 6.5 13.3
Net Income, Adjusted 3,903 4,586 4,640 5,294
Net Income YoY % -2.7 17.5 1.2 14.1
Diluted EPS 5.88 7.07 7.12 8.14
Diluted EPS YoY % — 20.3 0.8 14.3
Free Cash Flow 6,892 7,171 8,418 6,350
Free Cash Flow YoY % 86.5 4.1 17.4 -24.6
Boeing's immense $441 billion backlog provides cushion in uncertain times.
Neal Dihora, CFA Senior Analyst
neal.dihora@morningstar.com +1 (312) 244-7266
Research as of 07 Feb 2014 Estimates as of 29 Jan 2014 Pricing data through 04 Apr 2014 Rating updated as of 04 Apr 2014
Investment Thesis 29 Jan 2014
Risk-taking has been a hallmark at Boeing, and the revolutionary 787 returns the company to that historical culture. While the plane's cost overruns, supply chain issues, and grounding by the Federal Aviation Administration have caused anxiety among investors, we think the product will be a long-term winner. Moreover, the 737 re-engine allows the company to strengthen its balance sheet and regain market share as it ponders the development of other aircraft variants. The company operates in a commercial aircraft duopoly with Airbus--a market that Boeing estimates at $4.5 trillion (34,000 aircraft with 14,300 replacements) during the next 20 years--even as rivals in Canada and China seek to take a slice of this pie.
Air travel has consistently grown 1.5% faster than GDP over a long time frame. High fuel prices make purchasing fuel-efficient aircraft a profit-enhancing move, and cheap financing allows customers to do so. Boeing has leveraged research and development funding from defense into the commercial arena, and the reverse. We believe the company generally enjoys the backing of the U.S.
government in financial and negotiating matters, including both commercial and defense sales.
Commercial sales growth is powered by higher production rates and robust backlogs. The 737 production will rise to 42 per month by mid-2014 from today's 38-per-month pace. The 787 production reached 10 units each month as of year-end 2013, versus an average of seven during the year. However, the higher production of the 787 will lower operating margins due to delays and cost overruns prior to launch.
The defense business generates nearly 40% of the firm's earnings.
Boeing correctly anticipated austere budgets and proactively cut staff and facilities to protect profits. Total defense cuts could reach
$1 trillion over the next nine years to 2021. Its strong product offerings are likely to be overwhelmed by budget issues, and we forecast defense will decline to 32% of total sales in 2015 versus 50% in 2010.
Boeing manufactures commercial airplanes, provides defense equipment, and maintains a small captive finance division. With headquarters in Chicago, the firm actively competes with Airbus in commercial aviation, and Lockheed Martin, Northrop Grumman, and General Dynamics in defense operations. Sales are nearly split 60/40 between the airplane and defense segments. The firm generated nearly $87 billion in sales and employed 168,400 people in 2013.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
Analyst Note: Adjusted EPS are per Boeing's 'Core' basis
(USD Mil)
Contents
Investment Thesis Morningstar Analysis
Analyst Note
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
1
- 2 2 2 2 4
5 5 5 7 8 - 10 14 16
Morningstar Analysis
Valuation, Growth and Profitability 29 Jan 2014 Our fair value estimate is $120 per share. We see operating margins averaging 8.3% during our explicit five-year forecast compared with our 6.9% posted in the last five years. We also forecast total sales to grow 6% per year versus the 7.6% experienced in the prior five years. Sales growth is underpinned by higher production as the firm works down its massive 5,000-plus aircraft order book. We have incorporated announced production rate increases, updated delivery schedules, and embedded a difficult defense environment. For defense, we see sales decline by about 1.4% per year, on average, over the next five years with 2015 being the trough. The recent budget agreement delays the full impact of sequestration through 2016, as currently written into law. Our estimates do not expect the full $1 trillion in cuts will be implemented as called for in the Budget Control Act of 2011.
Scenario Analysis
We use scenario analysis to evaluate the upside potential and downside risk to our fair value estimate. In the best-case scenario, continued economic growth and a duopoly market position with Airbus will allow Boeing to ramp up 737 production to 42 per month by late 2014 as competition from the CSeries and COMAC 919 fails to dent 737 demand.
Meanwhile, Boeing is able to ramp up 787 production to 10 per month by 2014 and increasing thereafter. Both events allow for higher operating margin performance than in our base case scenario. Defense operations are able to grow slightly as the budget challenges fizzle out on strong congressional support. Under this scenario, we estimate Boeing's fair value at 31% higher per share than our base case.
We capture the downside risk to the stock under the worst-case scenario when strong competition from new entrants, enhanced success of the A320neo, or an economic slowdown take the wind out of the 737 ramp-up. Further delays to the 787 due to supply chain issues could slow
revenue growth. Meanwhile, defense budgets decline sharply as the government tries to rein in the federal deficit, causing Boeing's defense sales to drop. Under this set of assumptions, we value Boeing at 41% lower per share than our base case.
Economic Moat
Boeing's economic moat is built on the relatively high barriers to entry imposed by the technical knowledge required to design, assemble, and certify a commercial aircraft. The company has leveraged its know-how between its defense and commercial businesses over the years, and we expect this to continue. Even in the face of a declining defense budget in the U.S., we anticipate Boeing will focus its efforts in saving programs that will provide the largest level of benefits to the overall firm.
As an assembler, Boeing designs the aircraft, operates and coordinates a global supply chain, tests the product for certification, and provides after-sales support all over the world. These tasks involve a high degree of technical and operational knowledge that new players cannot easily duplicate. Further, during the past 50 years, competition from Lockheed, General Dynamics, de Havilland, McDonnell Douglas, and several Russian manufacturers has disappeared, and Boeing now operates in a duopoly with Airbus in the all-important single- and twin-aisle segments.
Lastly, Boeing enjoys sticky customer relationships because airlines are often hesitant to try unproven new products that also increase fleet complexity. Boeing has leveraged these competitive advantages to deliver annual returns on invested capital, averaging a solid 22% during the past five years, evidence of the firm's narrow economic moat.
Moat Trend
The Boeing-Airbus duopoly continues to dominate the
market for commercial aircraft. The total backlog between
the two competitors stands at more than 10,000 aircraft and
represents more than five years of production at peak
announced rates. In general, airlines prefer buying planes from Boeing and Airbus, which boast established product lines and have a long history of successful aircraft. All manufacturers continue to push technology over time, including for comfort and fuel efficiency, including Pratt's geared turbo fan and GE's Leap engines. Switching costs, such as pilot and crew training along with maintenance supplies and personnel, further prevent established airlines from trying new products.
However, startups and fast-growing carriers in emerging countries do not face the same obstacles. This could allow new manufacturers, especially those backed by deep-pocketed governments, to take market share. For example, China-based COMAC launched a regional aircraft in 2002 (and may enter into service in 2014) and the larger C919 in 2008. Both offerings have missed initial entry into service dates and continue to be plagued by setbacks. The C919 currently has an expected entry into service date of 2016, but with required flight testing and other issues, late 2018 seems a more appropriate time frame. Furthermore, competitors that already have aircraft offerings, including Bombardier, Embraer, Mitsubishi, and Sukhoi, have had
extremely limited success with their offerings (backlogs of 304, 366, 165, and 250 as of mid-2013). We believe these events point to the strong barriers to entry into the commercial aircraft market.
Within the defense business, the operating environment will become more difficult as revenue opportunities diminish. However, Boeing has been proactive with labor and facility adjustments and has protected profitability.
Overall, we believe Boeing's ability to generate returns
above its cost of capital remains strong and we now rate
the firm's moat trend as stable. (Our prior negative trend
was largely dependent on competitive offerings that have
been materially delayed, such as the C919, or have not been
competitive with Boeing's current offering, such as the
CSeries.)
Bulls Say/Bears Say
Bulls Say Bears Say
3 Boeing has a massive $441 billion backlog, nearly 5 times estimated 2014 sales, providing strong revenue visibility.
3 The U.S. Air Force refueling tanker project (KC-46A) will initially replace 179 of the 400 KC-135 tankers currently in service. The first 18 aircraft are worth $3.5 billion and are expected to be delivered by 2017. The full contract could be worth more than $75 billion.
3 Boeing's decision to re-engine the 737 means a more controlled R&D foray, allowing for large cash flow generation. An entirely new airplane would probably cost north of $10 billion to develop.
3 Airbus was first to market with the next-generation single-aisle aircraft, the A320neo (new engine option).
Its first-mover advantage has allowed it to take nearly 60% of the orders, and Boeing's 737-MAX's later launch may be too late to recapture market share.
3 Boeing's defense business will suffer as budget deficits force its largest customer to make across-the- board cuts.
3 Boeing's share in the global fighter jet market is poised
to decline as Lockheed ramps up F-35 production.
2014(E) 2015(E) 2016(E) 2017(E) 2018(E)
Cash and Equivalents (beginning of period) 9,088 9,655 10,459 14,777 17,907
Adjusted Available Cash Flow 4,756 4,671 6,923 6,705 7,790
Total Cash Available before Debt Service 13,844 14,326 17,383 21,481 25,697
Principal Payments -657 -770 -821 — —
Interest Payments -322 -303 -282 -229 -170
Other Cash Obligations and Commitments -1,000 -1,000 -750 -750 -750
Total Cash Obligations and Commitments -1,979 -2,073 -1,853 -979 -920
USD Millions
% of Commitments
Beginning Cash Balance 9,088 116.4
Sum of 5-Year Adjusted Free Cash Flow 30,844 395.2
Sum of Cash and 5-Year Cash Generation 39,932 511.6
Revolver Availability — —
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 39,932 511.6
Sum of 5-Year Cash Commitments -7,805 —
BA Sector Universe
Business Risk 4 5.1 5.0
Cash Flow Cushion 3 5.9 6.1
Solvency Score 5 4.4 4.9
Distance to Default 1 3.9 3.9
Credit Rating A BBB+ BBB+
Five Year Adjusted Cash Flow Forecast (USD Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
Boeing is in good financial shape, with $15.3 billion in cash and securities versus $9.6 billion in debt at year-end. The company's balance sheet has grown considerably during the past two years as delays on the 787 led to large increases in inventory. Total inventory was $42.9 billion. Total 787 inventory was more than $33.1 billion. Gross inventory is expected to peak in 2014 and decline thereafter. While some of this will turn into cash upon delivery, the anticipated increase in production rates during the next several years will probably keep a lid on the improvement.
The firm uses a combination of debt and equity to fund investments. While historically it maintained a net cash position, the firm issued $5.9 billion in debt in 2009 to make advance payments to its suppliers on the 787 program.
Boeing's inventories have increased with delays in the 787 and 747 programs. While anticipated deliveries should alleviate some pressure, the increase in production rates will keep inventory levels at a high value. Overall, the firm's debt/capital ratio was 39% at year-end 2013, with debt/EBITDA at 1.1 times and interest coverage of 22 times.
We anticipate the company will begin to pay down debt over the coming years and begin repurchasing shares. The firm raised its annual dividend by 50% in late 2013, and we expect this to consume $2.2 billion in cash in 2014 and grow somewhat over time.
Enterprise Risk
Boeing's $441 billion backlog ($373 billion in commercial and $68 billion in defense) offers strong revenue visibility.
However, production varies with the macroeconomic environment, perceived threats to air travel, and supply chain capacity. While the company has completed the development phase for two major programs, the 787 and the 747, it must now deal with meeting delivery timelines.
Further delays or disruptions would severely undermine the
firm's financial performance, as operating margins are
Credit Analysis
correlated to production volume levels. On the defense side
of the business, Boeing faces significant uncertainty from
government decisions. Defense procurement is an arcane,
lengthy, and often political process that can shift with
changes in the geopolitical landscape. The Defense
Department is likely to face intense budgetary pressure
during the next 10 years that could lead to lower revenue
opportunity, lower profits, or both.
Name Position Shares Held Report Date* InsiderActivity MR. RAYMOND L.
CONNER CEO, Divisional/President, Divisional/Vice Chairman, Divisional
133,237 07 Mar 2014 15,828
MR. DENNIS A.
MUILENBURG COO/President/Vice Chairman 126,961 07 Mar 2014 —
J. MICHAEL LUTTIG Executive VP/General Counsel 108,447 07 Mar 2014 —
TIMOTHY J. KEATING Senior VP, Divisional 86,147 07 Mar 2014 —
THOMAS J. DOWNEY Senior VP, Divisional 62,960 07 Mar 2014 —
SHEPARD W. HILL President, Subsidiary/Senior VP,
Divisional 62,625 07 Mar 2014 14,129
JOHN J. TRACY Chief Technology Officer/Senior VP, Divisional
60,381 07 Mar 2014 15,000
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
American Funds Washington Mutual Inv Fd 3.40 5.01 -2,710 31 Dec 2013
American Funds American Balanced Fund 1.88 2.80 -1,500 31 Dec 2013
American Funds Fundamental Investors 1.65 2.59 -600 31 Dec 2013
Vanguard Total Stock Mkt Idx 1.55 0.47 90 28 Feb 2014
American Funds Growth Fund of America 0.87 0.67 -215 31 Dec 2013
Concentrated Holders
Fidelity® Select Defense & Aero Port 0.18 16.56 -94 28 Feb 2014
Prudential Jennison Market Neutral Fund — 12.29 — 28 Feb 2014
Fidelity® Select Air Transportation Port 0.03 9.44 -47 28 Feb 2014
Modelim Flexible — 9.10 — 31 Dec 2013
iShares US Aerospace & Defense 0.04 8.89 — 03 Apr 2014
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date
Fidelity Management and Research Company 1.92 0.29 5,796 31 Dec 2013
T. Rowe Price Associates, Inc. 4.41 1.03 1,614 31 Dec 2013
Arrowstreet Capital Limited Partnership 0.21 1.17 1,397 31 Dec 2013
State Street Corp 4.53 0.51 1,279 31 Dec 2013
Susquehanna Financial Group, LLLP 0.26 0.14 871 31 Dec 2013
Top 5 Sellers
Capital World Investors 9.11 2.61 -6,100 31 Dec 2013
Invesco Advisers, Inc 0.15 0.11 -1,996 31 Dec 2013
Wellington Management Company, LLP 1.04 0.31 -1,605 31 Dec 2013
Jennison Associates LLC 1.34 1.34 -1,119 31 Dec 2013
Neuberger Berman LLC 1.25 1.32 -1,001 31 Dec 2013
Management 23 Oct 2013
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
Boeing has had a colorful history with respect to its leaders.
Early leaders were risk-takers, while recent managers have been risk-averse in comparison. Boeing is the largest aircraft manufacturer because of its willingness to introduce a product like the 747 in the late 1960s, a plane that didn't even have a market when initially launched. Airbus was able to enter the airplane marketplace in part due to the risk-averse mentality of recent company leaders who focused on baby steps to product evolution. However, the 787 program shows that the company is returning to its roots. We anticipate a new 737 is also in the cards following the current re-engine cycle.
James McNerney held leadership roles at GE Aviation and
3M before joining Boeing as CEO in July 2005. The
12-member board is largely independent and brings diverse
business experience. The firm asks its CEO and senior
management to maintain stock ownership of 3-6 times the
value of their annual base salary to align management's
incentives with shareholders'. Following strong investments
in new products over the past five years, the company has
not been active in share repurchases. This could change as
the release of inventory generates ample cash beyond 2013.
Analyst Notes
Boeing Reports Strong 4Q Results, Offers Soft 2014 Guidance 29 Jan 2014
Narrow-moat Boeing concluded a solid execution year and reported strong fourth-quarter results, with deliveries of 172 aircraft versus 165 last year. Boeing delivered 7% total sales growth to $23.8 billion as commercial rose 4% to $14.7 billion and defense up 6% to $8.9 billion. The surprise continues to be strong operating margins: Commercial was higher by 140 basis points, and defense expanded by 180 basis points. All in, the margins declined 90 basis points to 6.4% because of higher pension and other costs. Earnings per share were higher by 26% to $1.61. Core EPS, which excludes certain pension costs, increased 29% to $1.88. For the full year, sales grew 6% to $86.6 billion (commercial at
$53 billion and military at $33.2 billion), operating margins expanded 30 basis points to 9.1%, and EPS was higher by 17% to $5.96.
Net orders for the year were robust at 1,355 aircraft, largely driven by the 737-MAX and the launch of the 777X at the Dubai Air Show in the fall of 2013. For 2014, 737 rates are set to increase to 42 per month from 38 and will help deliveries increase by nearly 9%. It previously announced plans to raise production of the 787 to 12 in 2016 and 14 by 2020.
The company provided softer-than-expectations 2014 guidance: EPS of $6.10-$6.30 (Core EPS $7.00-$7.20) and sales guidance of $87.5 billion-$90.5 billion. Commercial airplane deliveries of 715-725 will lead to sales of $57.5 billion-$59.5 billion. Military sales are expected to decline to $30 billion-$31 billion. This is worse than our views on both sales and earnings and looks to be driven more by pricing, or discounts offered, than deliveries of commercial aircraft. We will lower our sales projections, but a much improved pension underfunded balance is a positive and we don't expect a material change in our fair value estimate.
The outlook is well grounded, with a commercial backlog of 5,080 aircraft worth $373 billion. Including military, total backlog was $441 billion.
Raising Fair Value Estimate After Boeing's Strong Orders at Dubai Air Show 18 Nov 2013
Narrow-moat Boeing announced the official launch of the 777X program with 259 orders and commitments worth more than $95 billion at list prices. Furthermore, it announced orders for the 787 program as well as the 737 program, including MAX and Next Generation, that put the 737 program over 1,000 total since launch. These orders put Boeing's early take at more than $100 billion, and add to the $344 billion commercial backlog from the third quarter of 2013. We are raising our fair value estimate to $120 per share from $113 resulting from strong growth rates supported by continued strong orders.
The 777X program customers include Lufthansa with 34 airplanes, Etihad Airways with 25, Qatar Airways with 50, and Emirates with 150. Middle East-based airlines continue to provide support for wide body programs at both Boeing and Airbus.
Boeing Reports Strong 3Q Results; Raising Our Fair Value Estimate 23 Oct 2013
Narrow-moat Boeing BA reported strong third-quarter results as deliveries of 170 aircraft, versus 149 last year, helped drive nearly 15% sales growth in the commercial airplane segment to $14 billion. With defense sales also up 2.6%, the total company delivered 10.6% revenue growth to $22.1 billion. The surprise continues to be the strong operating margins, which expanded 30 basis points to 8.1%
even as 787 deliveries nearly doubled. Earnings per share
were higher by 12% to $1.51. Core EPS, which exclude
certain pension costs, increased 16% to $1.80.
Analyst Notes
We are raising our fair value estimate to $113 per share from $97 after updating our 2013 and 2014 estimates.
Furthermore, we have updated our pension cost estimates based on the industry commentary that discount rates will be nearly 75 basis points higher than year-end 2012, which will reduce the pension underfundedness at a faster clip than in our prior forecasts. We had previously estimated that every 25-basis-point change equated to $3 of fair value;
the aggregate 75 basis points, drawn out over two years, is worth nearly $9 of our change. The remaining increase was due to stronger-than-expected operating margins.
The company's 170 commercial deliveries were split as follows: 112 from the 737 program, 4 of the 747, 5 of the 767, 26 of the 777, and 23 of the 787. It announced plans to raise production of the 787 to 12 in 2016 and 14 by 2020.
Defense margins were affected by charges on the F-15 and C-17 programs.
The company raised its 2013 EPS guidance to $5.40-$5.55
(prior view $5.10-$5.30) while maintaining sales guidance
of $83 billion-$86 billion. Commercial airplane deliveries of
635-645 will lead to sales of $51 billion-$53 billion. Military
sales are expected to be $31.5 billion-$32.5 billion. The
outlook is well grounded, with a commercial backlog of more
than 4,700 aircraft worth $344 billion. Including military,
total backlog was $415 billion, or more than 4.5 times annual
sales.
Growth (% YoY)
3-Year
Hist. CAGR 2011 2012 2013
2014 20155-Year Proj. CAGR
Revenue 10.4 6.9 18.9 6.0 4.3 8.7 5.8
EBIT 9.7 17.6 8.0 4.0 6.5 13.3 9.1
EBITDA 7.8 11.9 8.0 3.5 7.9 12.2 8.7
Net Income 11.5 21.1 -2.7 17.5 1.2 14.1 8.6
Diluted EPS 10.2 -100.0 — 20.3 0.8 14.3 9.6
Earnings Before Interest, after Tax 8.8 18.9 -0.5 8.8 -11.5 12.7 5.0
Free Cash Flow 58.9 106.9 86.5 4.1 17.4 -24.6 6.2
Profitability
3-Year
Hist. Avg 2011 2012 2013
2014 20155-Year Proj. Avg
Operating Margin % 7.9 8.5 7.7 7.6 7.7 8.1 8.3
EBITDA Margin % 10.2 10.9 9.9 9.7 10.0 10.4 10.6
Net Margin % 5.3 5.8 4.8 5.3 5.1 5.4 5.6
Free Cash Flow Margin % 7.4 5.4 8.4 8.3 9.3 6.5 8.1
ROIC % 15.8 16.0 14.7 16.7 15.6 17.1 17.0
Adjusted ROIC % 21.1 22.3 20.4 20.6 20.0 22.3 25.7
Return on Assets % 5.0 5.4 4.6 5.1 5.0 5.7 6.0
Return on Equity % 85.1 127.9 83.1 44.2 30.7 32.9 29.9
Leverage
3-Year
Hist. Avg 2011 2012 2013
2014 20155-Year Proj. Avg
Debt/Capital 0.60 0.78 0.64 0.39 0.32 0.28 0.22
Total Debt/EBITDA 1.36 1.65 1.28 1.15 0.79 0.65 0.53
EBITDA/Interest Expense 18.14 15.10 17.54 21.78 28.12 33.56 45.58
2012 2013
2014(E) 2015(E)Price/Fair Value 1.03 1.14 — —
Price/Earnings 12.8 19.3 17.9 15.6
EV/EBITDA 6.6 11.5 9.8 8.8
EV/EBIT 8.5 14.7 12.7 11.2
Free Cash Flow Yield % 10.4 6.0 7.9 5.6
Dividend Yield % 2.3 1.4 2.3 2.4
Cost of Equity % 12.0
Pre-Tax Cost of Debt % 4.3
Weighted Average Cost of Capital % 9.6
Long-Run Tax Rate % 31.0
Stage II EBI Growth Rate % 5.0
Stage II Investment Rate % 30.0
Perpetuity Year 15
USD Mil Firm Value (%) Per Share
Value
Present Value Stage I 31,517 32.4 42.24
Present Value Stage II 28,970 29.8 38.83
Present Value Stage III 36,834 37.9 49.37
Total Firm Value 97,320 100.0 130.44
Cash and Equivalents 15,258 — 20.45
Debt -9,635 — -12.91
Preferred Stock — — —
Other Adjustments -14,267 — -19.12
Equity Value 88,677 — 118.85
Projected Diluted Shares 746
Fair Value per Share —
Morningstar Analyst Forecasts
Forecast Fiscal Year Ends in December
Financial Summary and Forecasts
Valuation Summary and Forecasts
Key Valuation Drivers
Discounted Cash Flow Valuation
Additional estimates and scenarios available for download at http://select.morningstar.com.
The data in the table above represent base-case forecasts in the company’s reporting currency as of the beginning of the current year. Our fair value estimate may differ from the equity value per share shown above due to our time value of money adjustment and in cases where probability-weighted scenario analysis is performed.
(USD)
2011 2012 2013
2014 2015Revenue 68,735 81,698 86,623 90,331 98,227
Cost of Goods Sold 55,867 68,644 73,268 76,297 82,649
Gross Profit 12,868 13,054 13,355 14,034 15,579
Selling, General & Administrative Expenses 3,408 3,717 3,956 4,125 4,486
Research & Development 3,918 3,298 3,071 3,162 3,438
Other Operating Expense (Income) -302 -272 -234 -244 -265
Depreciation & Amortization (if reported separately) — — — — —
Operating Income (ex charges) 5,844 6,311 6,562 6,991 7,920
Restructuring & Other Cash Charges — — — — —
Impairment Charges (if reported separately) — — — — —
Other Non-Cash (Income)/Charges — — — — —
Operating Income (incl charges) 5,844 6,311 6,562 6,991 7,920
Interest Expense 498 463 386 322 303
Interest Income 47 62 56 56 56
Pre-Tax Income 5,393 5,910 6,232 6,725 7,673
Income Tax Expense 1,382 2,007 1,646 2,085 2,379
Other After-Tax Cash Gains (Losses) — — — — —
Other After-Tax Non-Cash Gains (Losses) 7 -3 -1 — —
(Minority Interest) — — — — —
(Preferred Dividends) — — — — —
Net Income 4,018 3,900 4,585 4,640 5,294
Weighted Average Diluted Shares Outstanding 753 764 770 754 740
Diluted Earnings Per Share 5.34 5.11 5.96 6.16 7.15
Adjusted Net Income 4,011 3,903 4,586 4,640 5,294
Diluted Earnings Per Share (Adjusted) 5.33 5.11 5.96 6.16 7.15
Dividends Per Common Share 1.65 1.73 1.91 2.92 3.04
EBITDA 7,519 8,122 8,406 9,069 10,179
Adjusted EBITDA 7,519 8,122 8,406 9,069 10,179
Morningstar Analyst Forecasts
Income Statement (USD Mil)
Fiscal Year Ends in December Forecast
2011 2012 2013
2014 2015Cash and Equivalents 10,049 10,341 9,088 9,655 10,459
Investments 1,223 3,217 6,170 6,170 6,170
Accounts Receivable 5,793 5,608 6,546 6,826 7,423
Inventory 32,240 37,751 42,912 41,807 41,890
Deferred Tax Assets (Current) 29 28 14 14 14
Other Short Term Assets 476 364 344 344 344
Current Assets 49,810 57,309 65,074 64,816 66,301
Net Property Plant, and Equipment 9,313 9,660 10,224 10,244 10,485
Goodwill 4,945 5,035 5,043 5,043 5,043
Other Intangibles 3,044 3,111 3,052 3,052 3,052
Deferred Tax Assets (Long-Term) 5,892 6,753 2,939 2,939 2,939
Other Long-Term Operating Assets 4,296 4,056 3,627 3,627 3,627
Long-Term Non-Operating Assets 2,686 2,972 2,704 2,704 2,704
Total Assets 79,986 88,896 92,663 92,426 94,151
Accounts Payable 8,406 9,394 9,498 9,891 10,714
Short-Term Debt 2,353 1,436 1,563 657 770
Deferred Tax Liabilities (Current) 2,780 4,485 6,267 6,167 6,067
Other Short-Term Liabilities 27,735 29,667 34,158 35,658 35,658
Current Liabilities 41,274 44,982 51,486 52,373 53,209
Long-Term Debt 10,018 8,973 8,072 6,509 5,852
Deferred Tax Liabilities (Long-Term) 122 366 156 156 156
Other Long-Term Operating Liabilities 907 1,429 950 950 950
Long-Term Non-Operating Liabilities 24,057 27,179 17,002 17,002 17,002
Total Liabilities 76,378 82,929 77,666 76,990 77,169
Preferred Stock — — — — —
Common Stock 5,061 5,061 5,061 5,061 5,061
Additional Paid-in Capital 4,033 4,122 4,415 4,415 4,415
Retained Earnings (Deficit) 27,524 30,037 32,964 35,403 38,449
(Treasury Stock) -16,603 -15,937 -17,671 -19,671 -21,171
Other Equity -16,500 -17,416 -9,894 -9,894 -9,894
Shareholder's Equity 3,515 5,867 14,875 15,314 16,860
Minority Interest 93 100 122 122 122
Total Equity 3,608 5,967 14,997 15,436 16,982
Morningstar Analyst Forecasts
Balance Sheet (USD Mil)
Fiscal Year Ends in December Forecast
2011 2012 2013
2014 2015Net Income 4,018 3,900 4,585 4,640 5,294
Depreciation 1,457 1,811 1,844 2,078 2,259
Amortization 218 — — — —
Stock-Based Compensation 186 193 206 215 234
Impairment of Goodwill 119 84 96 — —
Impairment of Other Intangibles — — — — —
Deferred Taxes — — — -100 -100
Other Non-Cash Adjustments 160 640 370 — —
(Increase) Decrease in Accounts Receivable -292 -27 -879 -280 -597
(Increase) Decrease in Inventory -10,012 -5,681 -5,562 1,105 -84
Change in Other Short-Term Assets — — — — —
Increase (Decrease) in Accounts Payable 1,164 1,199 -298 393 823
Change in Other Short-Term Liabilities 7,005 5,389 7,817 1,500 —
Cash From Operations 4,023 7,508 8,179 9,550 7,830
(Capital Expenditures) -1,619 -1,606 -2,047 -2,098 -2,500
Net (Acquisitions), Asset Sales, and Disposals -42 -124 -26 — —
Net Sales (Purchases) of Investments 3,961 -2,014 -2,941 — —
Other Investing Cash Flows 69 -7 -140 — —
Cash From Investing 2,369 -3,751 -5,154 -2,098 -2,500
Common Stock Issuance (or Repurchase) — — -2,801 -2,000 -1,500
Common Stock (Dividends) -1,244 -1,322 -1,467 -2,201 -2,248
Short-Term Debt Issuance (or Retirement) — — — -906 113
Long-Term Debt Issuance (or Retirement) -131 -2,016 -863 -1,563 -657
Other Financing Cash Flows -325 -139 882 -215 -234
Cash From Financing -1,700 -3,477 -4,249 -6,885 -4,526
Exchange Rates, Discontinued Ops, etc. (net) -2 18 -29 — —
Net Change in Cash 4,690 298 -1,253 567 804
Morningstar Analyst Forecasts
Cash Flow (USD Mil)
Fiscal Year Ends in December Forecast
Company/Ticker Price/Fair
Value 2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)Lockheed Martin Corporation LMT USA 1.24 16.3 15.2 14.8 9.3 8.7 8.8 12.9 13.9 14.2 9.7 8.8 7.7 1.1 1.2 1.2
Raytheon Company RTN USA 1.08 14.7 14.4 12.8 8.6 8.6 7.7 13.5 16.0 12.8 2.6 2.7 2.3 1.2 1.4 1.4
Northrop Grumman Corp NOC USA 1.23 13.7 13.7 12.7 7.1 7.7 7.5 11.8 13.5 13.2 2.3 2.7 2.3 1.0 1.1 1.1
Embraer S.A. ERJ USA 1.07 17.3 13.0 12.4 5.9 7.2 6.9 NM 12.3 12.6 1.7 1.6 1.5 1.0 1.0 1.0
Average 15.5 14.1 13.2 7.7 8.1 7.7 12.7 13.9 13.2 4.1 4.0 3.5 1.1 1.2 1.2
Boeing Co BA US 1.06 19.3 17.9 15.6 11.5 9.8 8.8 16.6 12.7 17.8 6.9 6.2 5.6 1.2 1.0 1.0
Company/Ticker Total Assets
(Mil) 2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)Lockheed Martin Corporation LMT USA 36,188 USD 20.0 18.5 16.7 23.9 23.9 22.6 120.3 63.2 53.7 8.0 9.3 9.0 3.2 3.4 3.5
Raytheon Company RTN USA 25,967 USD 12.9 13.5 13.1 14.5 15.5 16.4 20.9 18.9 19.1 7.6 8.1 8.7 2.4 2.3 2.4
Northrop Grumman Corp NOC USA 26,381 USD 11.2 9.7 9.8 13.4 11.3 12.1 19.4 18.5 18.5 7.4 7.3 7.4 2.2 1.8 1.9
Embraer S.A. ERJ USA 10,143 USD 11.1 8.2 7.9 19.6 15.7 16.0 10.1 13.3 12.4 3.5 4.8 4.8 1.2 1.2 1.3
Average 13.8 12.5 11.9 17.9 16.6 16.8 42.7 28.5 25.9 6.6 7.4 7.5 2.3 2.2 2.3
Boeing Co BA US 92,663 USD 16.7 15.6 17.1 20.6 20.0 22.3 44.2 30.7 32.9 5.1 5.0 5.7 1.4 2.3 2.4
Company/Ticker Revenue
(Mil) 2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)Lockheed Martin Corporation LMT USA 45,358 USD -3.9 -2.2 -0.1 1.6 16.9 -1.3 9.2 15.0 2.6 285.1 7.0 -7.6 14.6 12.8 8.0
Raytheon Company RTN USA 23,706 USD -2.9 -4.5 -2.1 -1.7 8.9 13.2 9.0 10.1 12.6 55.5 -5.5 16.0 11.3 2.8 10.0
Northrop Grumman Corp NOC USA 24,661 USD -2.2 -3.9 -0.6 -0.2 -2.1 3.6 6.9 5.2 8.2 -3.0 -17.6 9.4 10.4 -5.6 12.0
Embraer S.A. ERJ USA 6,235 USD 1.1 1.0 4.2 16.6 -13.1 4.3 -2.5 45.9 4.2 -248.0 -443.6 -2.4 — — —
Average -2.0 -2.4 0.4 4.1 2.7 5.0 5.7 19.1 6.9 22.4 -114.9 3.9 12.1 3.3 10.0
Boeing Co BA US 86,623 USD 6.0 4.3 8.7 4.0 6.5 13.3 20.3 0.8 14.3 4.1 17.4 -24.6 10.2 53.2 4.0
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Valuation Analysis
Returns Analysis
Growth Analysis
Price/Earnings EV/EBITDA Price/Free Cash Flow Price/Book Price/Sales
ROIC % Adjusted ROIC % Return on Equity % Return on Assets % Dividend Yield %
Revenue Growth % EBIT Growth % EPS Growth % Free Cash Flow Growth % Dividend/Share Growth %
Last Historical Year
Last Historical Year
Company/Ticker Net Income
(Mil) 2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)Lockheed Martin Corporation LMT USA 2,981 USD 9.2 11.2 11.0 12.1 14.2 14.1 9.9 11.9 11.7 6.6 7.7 7.6 8.2 8.4 8.2
Raytheon Company RTN USA 1,996 USD 21.8 23.6 25.8 14.3 15.9 18.1 12.4 14.1 16.3 8.4 9.4 10.6 8.9 8.5 10.8
Northrop Grumman Corp NOC USA 1,952 USD 21.8 21.9 22.4 14.7 14.7 15.2 12.7 12.9 13.4 7.9 8.0 8.3 8.6 8.2 8.4
Embraer S.A. ERJ USA 342 USD 22.7 21.8 22.0 16.1 14.4 14.4 11.4 9.9 9.9 5.5 7.9 7.9 -3.0 8.4 7.9
Average 18.9 19.6 20.3 14.3 14.8 15.5 11.6 12.2 12.8 7.1 8.3 8.6 5.7 8.4 8.8
Boeing Co BA US 4,586 USD 15.4 15.5 15.9 9.7 10.0 10.4 7.6 7.7 8.1 5.3 5.1 5.4 7.1 8.3 5.4
Company/Ticker Total Debt
(Mil) 2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)Lockheed Martin Corporation LMT USA 6,152 USD 125.1 105.2 90.1 55.6 51.3 47.4 15.7 18.6 18.4 1.1 1.0 1.0 7.4 6.3 5.7
Raytheon Company RTN USA 4,734 USD 42.9 41.3 36.2 30.0 29.2 26.6 16.1 17.7 19.8 1.4 1.3 1.2 2.4 2.3 2.1
Northrop Grumman Corp NOC USA 5,928 USD 55.8 60.3 52.6 35.8 37.6 34.5 14.1 12.5 12.9 1.6 1.7 1.7 2.5 2.6 2.4
Embraer S.A. ERJ USA 2,206 USD 62.5 54.5 49.1 38.4 35.3 32.9 10.4 90.4 94.2 2.2 2.4 2.3 2.9 2.7 2.5
Average 71.6 65.3 57.0 40.0 38.4 35.4 14.1 34.8 36.3 1.6 1.6 1.6 3.8 3.5 3.2
Boeing Co BA US 9,635 USD 64.8 46.8 39.3 39.3 31.9 28.2 21.8 28.1 33.6 1.1 0.8 0.7 6.2 6.0 5.6
Company/Ticker Market Cap
(Mil) 2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)2013
2014(E) 2015(E)Lockheed Martin Corporation LMT USA 51,303 USD 8.02 11.87 15.31 1.20 1.29 1.37 0.93 1.04 1.11 — — — 51.7 50.7 53.3
Raytheon Company RTN USA 30,699 USD 10.17 11.16 16.73 1.69 1.77 2.06 1.63 1.70 1.99 — — — 34.8 32.5 31.7
Northrop Grumman Corp NOC USA 26,158 USD 22.02 19.80 27.27 1.63 1.47 1.70 1.51 1.35 1.59 — — — 27.9 25.1 25.9
Embraer S.A. ERJ USA 6,522 USD 2.29 2.87 3.45 1.99 2.18 2.35 1.20 1.37 1.53 18.42 46.41 54.13 20.9 15.3 15.7
Average 10.63 11.43 15.69 1.63 1.68 1.87 1.32 1.37 1.56 18.42 46.41 54.13 33.8 30.9 31.7
Boeing Co BA US 94,695 USD 11.81 12.81 14.13 1.26 1.24 1.25 0.43 0.44 0.46 5.81 14.70 13.58 32.0 47.4 42.5
Comparable Company Analysis
These companies are chosen by the analyst and the data are shown by nearest calendar year in descending market capitalization order.
Profitability Analysis
Leverage Analysis
Liquidity Analysis
Gross Margin % EBITDA Margin % Operating Margin % Net Margin % Free Cash Flow Margin %
Debt/Equity % Debt/Total Cap % EBITDA/Interest Exp. Total Debt/EBITDA Assets/Equity
Cash per Share Current Ratio Quick Ratio Cash/Short-Term Debt Payout Ratio %
Last Historical Year
Last Historical Year
3 Moat Valuation 3 Three-Stage Discounted Cash Flow 3 Weighted Average Cost of Capital 3 Fair Value Estimate 3 Scenario Analysis 3 Uncertainty Ratings 3 Margin of Safety 3 Consider Buying/Selling 3 Stewardship Rating
their fair value. A number of components drive this rating: (1) our assessment of the firm’s economic moat, (2) our estimate of the stock’s intrinsic value based on a discounted cash-flow model, (3) the margin of safety bands we apply to our Fair Value Estimate, and (4) the current stock price relative to our fair value estimate.
The concept of the Morningstar Economic Moat™ Rating plays a vital role not only in our qualitative assessment of a firm’s investment potential, but also in our valuation process.
We assign three moat ratings—none, narrow, or wide—as well as the Morningstar Moat Trend™ Rating—positive, stable, or negative—to each company we cover. There are two major requirements for firms to earn either a narrow or wide moat rating: (1) the prospect of earning above-average returns on capital; and (2) some competitive edge that pre- vents these returns from quickly eroding. The assumptions we make about a firm’s moat determine the length of “eco- nomic outperformance” that we assume in the latter stages
enterprise value and the value of the firm if no future net in- vestment were to occur. Said differently, moat value identi- fies the value generated by the firm as a result of any future net new investment. Our Moat Trend Rating reflects our as- sessment of whether each firm’s competitive advantage is either getting stronger or weaker, since we think of moats as dynamic, rather than static.
At the heart of our valuation system is a detailed projection of a company’s future cash flows. The first stage of our three- stage discounted cash flow model can last from 5 to 10 years and contains numerous detailed assumptions about various financial and operating items. The second stage of our mod- el—where a firm’s return on new invested capital (RONIC) and earnings growth rate implicitly fade until the perpetuity year—can last anywhere from 0 years (for no-moat firms) to 20 years (for wide-moat companies). In our third stage, we assume the firm’s RONIC equals its weighted average cost of capital, and we calculate a continuing value using a standard Morningstar Research Methodology for Valuing Companies
Analyst conducts company and industry research:
Financial statement analysis Channel checks Trade-show visits Industry and company reports and journals Conference calls Management and site visits 3 3
3 3
3 3
Strength of competitive advantage is rated:
None, Narrow, or Wide Advantages that confer an economic moat:
High Switching Costs (Microsoft)
Cost advantage (Wal-Mart) Intangible assets (Johnson & Johnson) Network Effect (Mastercard) Efficient Scale (Lockheed Martin)
Analyst considers past financial results and focuses on competitive position and future prospects to forecast future cash flows.
Assumptions are entered into Morningstar’s proprietary discounted cash-flow model.
The analyst then eval- uates the range of potential intrinsic values for the company and assigns an Uncertainty Rating: Low, Medium, High, Very High, or Extreme.
The Uncertainty Rating determines the margin of safety required before we would rec- ommend the stock.
The higher the uncer- tainty, the wider the margin of safety.
Analyst uses a discounted cash-flow model to develop a Fair Value Estimate, which serves as the foundation for the Morningstar Rating for stocks.
The current stock price relative to Morningstar’s Fair Value Estimate, adjusted for uncertainty, determines the Morningstar Rating for stocks.
The Morningstar Rating for stocks is updated each evening after the market closes.
QQQQQ QQQQ QQQ QQ Q
Fundamental Analysis
Economic Moat
TMRating
Company Valuation
Fair Value Estimate
Uncertainty
Assessment
3 Uncertainty Methodology 3 Cost of Equity Methodology 3 Morningstar DCF Valuation Model 3 Stewardship Rating Methodology
* Please contact a sales representative for more information.
Instead, we rely on a system that measures the estimated volatility of a firm’s underlying future free cash flows, tak- ing into account fundamental factors such as the diversity of revenue sources and the firm’s fixed cost structure.
We also employ a number of other tools to augment our valu- ation process, including scenario analysis, where we assess the likelihood and performance of a business under different economic and firm-specific conditions. Our analysts typically model three to five scenarios for each company we cover, stress-testing the model and examining the distribution of resulting fair values.
The Morningstar Uncertainty Rating captures the range of these potential fair values, based on an assessment of a company’s future sales range, the firm’s operating and fi- nancial leverage, and any other contingent events that may impact the business. Our analysts use this range to assign an appropriate margin of safety—or the discount/premium
prices receive our highest rating of five stars, whereas firms trading above our consider-selling prices receive our lowest rating of one star.
Morningstar Margin of Safety and Star Rating Bands
Price/Fair Value 2.75
2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25
Low Medium High Very High*
* Occasionally a stock’s uncertainty will be too high for us to estimate, in which case we label it Extreme.
• 5 Star
• 4 Star
• 3 Star
• 2 Star
• 1 Star
Uncertainty Rating
— 125%
105% — 80% —
— 95%
— 135%
110% —
70% —
— 90%
— 155%
115% —
60% —
— 85%
— 175%
125% —
50% —
— 80%
New Morningstar Margin of Safety and Star Rating Bands as of August 18th, 2011
Our corporate Stewardship Rating represents our assess- ment of management's stewardship of shareholder capital, with particular emphasis on capital allocation decisions.
Analysts consider companies' investment strategy and
valuation, financial leverage, dividend and share buyback
policies, execution, compensation, related party transac-
tions, and accounting practices. Corporate governance
practices are only considered if they've had a demonstrated
impact on shareholder value. Analysts assign one of three
ratings: "Exemplary," "Standard," and "Poor." Analysts judge
stewardship from an equity holder's perspective. Ratings
are determined on an absolute basis. Most companies will
receive a Standard rating, and this is the default rating in
the absence of evidence that managers have made
exceptionally strong or poor capital allocation decisions.
coverage list.
3 Encapsulates our in-depth modeling and quantitative work in one letter grade.
3 Allows investors to rank companies by each of the four underlying com- ponents of our credit ratings, including both analyst-driven and quantitative measures.
3 Provides access to all the underlying forecasts that go into the rating, available through our insti- tutional service.
different lenses—qualitative and quantitative, as well as fundamental and market-driven. We therefore evaluate each company in four broad categories.
Business Risk
Business Risk captures the fundamental uncertainty around a firm’s business operations and the cash flow generated by those operations. Key components of the Business Risk rating include the Morningstar Economic Moat
™Rating and the Morningstar Uncertainty Rating.
Cash Flow Cushion
™Morningstar’s proprietary Cash Flow Cushion
™ratio is a fundamental indicator of a firm’s future financial health The measure reveals how many times a company’s internal cash generation plus total excess liquid cash will cover its debt-like contractual commitments over the next five years. The Cash Flow Cushion acts as a predictor of financial distress, bringing to light potential refinancing, operational, and liquidity risks inherent to the firm.
3 3 3 3 3
3
The higher the rating, the less likely we think the company is to default on these obligations.
The Morningstar Corporate Credit Rating builds on the modeling expertise of our securities research team. For each company, we publish:
Five years of detailed pro-forma financial statements Annual estimates of free cash flow
Annual forecasts of return on invested capital
Scenario analyses, including upside and downside cases Forecasts of leverage, coverage, and liquidity ratios for five years
Estimates of off balance sheet liabilities
These forecasts are key inputs into the Morningstar Corporate Credit Rating and are available to subscribers at select.morningstar.com.
Morningstar Research Methodology for Determining Corporate Credit Ratings
Competitive Analysis
Cash-Flow Forecasts
Scenario Analysis
Quantitative Checks
Rating Committee
A AA
BBB
C
D
