Investext

Industry and Market Intelligence

1033485

Boeing Company - Company

Report

Binder, S.

5 October 1990
BEAR, STEARNS &
CO., INC.

The Investext Group

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 Investext
Stock Price Data And Rating 1989-91

Boeing Company (BA - 43)

Orders Sputtering, Earnings Vulnerable, But Valuation Is Attractive

1989 EPS: $1.96

1990 EPS Est.: $4.00
1991 EPS Est.: $5.30
P/E 1990 Est.: 10.8x
P/E 1991 Est.: 8.1x
Dividend: $1.00
Yield: 2.3%
52-Week Price Range: 62-38
Common Shares Out.: 346 Mil.
Book Value Per Share: $27.00
Return on Equity: 22.2%
S&P Rank: A-

SUMMARY AND RECOMMENDATION

Summary and Investment Conclusion
With the recent relative decline in Boeing's shares, we believe
that the risk/reward relationship is clearly more favorable than it has
been for over nine months. Boeing's shares offer five attractive
features:

* Valuation. Based on 1991 earnings, Boeing is now selling at only

8x earnings, a 35% discount from the S&P 400. In the 1981-82 recession,
Boeing's shares sold at a 25% discount from peak earnings. Over the
past 15 years, the 1981-82 relative discount was at the bottom end of
the range.

* The Second-Largest Exporter. Boeing is this country's second

largest exporter, next to IBM (IBM - 108). With the U.S. dollar
dropping 16% this year, Boeing's product line has become even cheaper
for Europeans and the Japanese to buy. At the same time, the weaker
dollar is also squeezing Boeing's arch rival, Airbus.
* Liquidity. Boeing boasts one of the best balance sheets in the
S&P 400. Cash totals $10 per share, and debt equals less than $1 per
share.

* Relative Earnings Strength. Although it is cyclical, Boeing's

earnings should hold up better than average during a recession. We
don't believe delivery stretchouts will be widespread and most likely
won't impact Boeing's most profitable product, the 747.

* Harvesting Cycle. In the 1981-82 time frame, Boeing not only

faced a sharp decline in orders and deliveries but had to triple its
research and development budget (1979-82) to finance its new 757 and
767 planes. Thus, earnings were torpedoed by two factors: lower
deliveries and higher R&D. Fortunately, Boeing did not launch the 777
plane prior to the Iraqi invasion. Instead, the company will continue
to operate mainly in the production mode without committing funds for
any major development projects. Thus, if a material recession does
occur, Boeing will not face the double whammy, higher R&D and lower

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deliveries, similar to what it confronted in 1981. There are two
concerns:

Economy. The economy does present a risk to Boeing's future. If

very high oil prices are sustained and the worldwide economy confronts
turbulent times, then Boeing's backlog and delivery schedule could
become even more vulnerable.

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Credit Squeeze. The fear of bank failures raises the question of
the availability of capital. Although Boeing is very liquid, its
customers -

airlines and leasing companies - are very dependent on securing

adequate capital. If a widespread credit squeeze were to appear,
Boeing's customer base may find it much more difficult to secure
financing to buy the planes.

Netting the risks against the rewards, we believe Boeing's shares

are nearing a more attractive valuation. The issues may be timing and
possibly lower prices. However, the downside is probably no greater
than 10%-15% from current levels. We don't believe the commercial
aircraft cycle has reached the finish line. Further, Boeing's earnings
should not collapse.

Since the beginning of Iraq's invasion of Kuwait, Boeing's shares

have fallen 25% as compared to the 14% drop in the S&P 400. The
relative drop may reflect investor concern that higher oil prices will
foster a major downturn in order activity and possibly further
stretchouts in aircraft deliveries. We address below the outlook for
orders, deliveries, and earnings.

Orders

Oil prices have historically influenced Boeing's order book.

During the 1972-76 period, higher oil prices depressed BA's orders. On
average, orders fell to 162 units per year. However, in the 1985-89
period, when oil prices were cut in half, orders surged to 522 planes
per year on average, nearly a three-and-a-half fold increase. There
were clearly other factors which contributed to the surge. But,
clearly, lower oil prices did contribute to the surge. We believe that
a prolonged oil shock of three to six months coupled with a weakening
economy will cause a sizable slowdown in aircraft orders as long as the
Middle East conflict continues.

Commercial Backlog Units 1990

Boeing's Commercial Backlog
Backlog in Units

10/3/90 Leasing
Aircraft Backlog Domestic Companies Europe
Model (In Units) Backlog Backlog Backlog Asia Other
% % % % %

707 21
737 906 39.4 28.0 22.7 8.3 1.6
747 263 6.8 2.3 24.7 62.8 3.4
757 350 48.6 22.6 24.0 3.7 1.1
767 175 22.3 37.7 13.7 17.2 9.1

1715 34.4 23.9 22.4 16.7 2.5

BACKLOG
Boeing's backlog now totals 1,715 planes, 35% derived from

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domestic airlines and 41% from foreign airlines (foreign airlines
account for 60% of the dollar backlog). The leasing companies account
for 24% of the total unit backlog. Two factors impact backlog: orders
and deliveries. As long as oil prices remain high and worldwide
economic growth is anemic, orders may remain soft, therefore depressing
backlog. At the same time, some deliveries may be stretched (i.e.,
USAir [U - 16]), but cancellations are unlikely.

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We believe that the 737 line and, to a lesser degree, the 757
aircraft line represent the vulnerable product lines for Boeing. The
domestic airlines and leasing companies, customers that may defer
deliveries first, dominate the 737 and 757 backlog. USAir's deferral of
14 737s and two 767s marked the first deferral. American Airlines (AMR
- 44) recently cancelled 20 MD-80 options, and Midway (MDW - 5 3/8) is
rumored to be deferring MD-80s firm deliveries into 1993 and 1994.

The four largest airlines, United Airlines (UAL - 113), American

Airlines, Delta (DAL - 55) and Northwest Airlines are clearly less
likely to stretch deliveries. However, if the economy deteriorates
significantly, they may be more apt to stretch their delivery
positions. The large U.S. airlines have enormous flexibility to stretch
or even cancel delivery slots without large financial penalties. In
contrast, the international delivery slots are in good shape. Most of
the international carriers are operating at high load factors,
suggesting that they need lift capacity. Further, they have
traditionally been less prone to cancelling or stretching out delivery
positions.

On balance, during a turbulent economic climate, with negative

real growth in the United States and slower growth abroad, backlog
could slip led by a dearth of aircraft orders.

EARNINGS

We believe our 1990 EPS estimate is relatively safe at $4.00.

However, if an economic downturn is sustained into 1991, our next
year's estimate could be impacted slightly, and 1992 could be cut by
roughly 10%. The big question is whether Boeing defers ramping up the
737 (17 units/month to 21) and the 757 (7-10 units/month) production
lines. Recently, Boeing stated that it still plans to go ahead with the
737 production increase. However, if orders slow precipitously and some
airlines choose to defer delivery positions, then Boeing may hold the
737 line stable at 17 units per month. The same applies for the 757
aircraft program.

Yet, earnings could be buffered by the deferral of the 777

aircraft program. If Boeing fails to generate orders to increase
production rates, they probably won't receive launch orders for the 777
program. We estimate that the launch of the 777 program would require
an additional $350 million of research and development costs in 1992
compared to the amount expensed in 1990. Lower R&D would help offset
the loss of 737 and 757 production revenues.

We don't believe that there is material downside in Boeing's

earnings stream. As noted above, our 1990 estimate of $4.00 per share
should be achieved. If Boeing chooses to keep 737 production rates
stable, the downside is only $0.20 per share lower than our current
estimate of $5.30 per share. In 1992, if the 737 and 757 production
lines are held stable at current rates and the 777 program is delayed,
we estimate earnings would total $5.50 per share, $0.50 less than our
estimate of $6.00 per share.

Note: For additional information, please refer to Highlights dated May

4, 1990.

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