Why Does Billionaire Andreas Halvorsen Love Boeing?

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We at Insider Monkey track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to develop investment strategies. We have found, for example, that the most popular small-cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year. We can also use our database to compare the most recent filings to those from the previous quarter and identify any large changes in a fund’s position.

We noticed that billionaire Andreas Halvorsen’s Viking Global initiated a position of more than 12 million shares in Boeing (NYSE: BA) in the first quarter of 2013, and that stock is now the fund’s largest holding. Read on for our analysis of the $76-billion market cap aerospace company, or see the full list of Halvorsen's stock picks.

On the rise

After a brief period of safety concerns related to the new Dreamliner aircraft, which kept the stock essentially flat in the first two months of 2013, Boeing has risen to about $100 per share placing it up 30% year-to-date. The company’s numbers for Q1 show a small decrease in sales and pretax income versus a year earlier, with earnings rising entirely on a lower effective tax rate.

Cash flow from operations came in at a little higher than $500 million, largely due to much higher inventories, which likely includes a buildup of Dreamliners in progress toward delivery, which was about even with the amount of cash the company used on capital expenditures.

Wall Street analysts are expecting $6.47 in earnings per share for this year, which makes for a current-year earnings multiple of 16. From that point, Boeing is expected to continue improving on the bottom line, and as a result the forward P/E falls to 14.

That’s a bit higher than pure value territory, and while business could boom from incoming plane deliveries, it might be best to wait for more information about how the company’s performance is comparing to analyst forecasts. SAC Capital Advisors, managed by billionaire Steve Cohen, was another major shareholder in Boeing at the end of March, reporting a position of 1.8 million shares (find Cohen's favorite stocks).

Market players

Other manufacturers of aircraft or aircraft components include Embraer (NYSE: ERJ), B/E Aerospace (NASDAQ: BEAV)), Spirit AeroSystems (NYSE: SPR)), and TransDigm Group (NYSE: TDG)). On a trailing basis, each of these peers is valued at over 20 times its trailing earnings. B/E Aerospace and Spirit experienced double-digit growth rates in both revenue and earnings last quarter compared to the first quarter of 2012, which is at least somewhat positive in the context of this valuation premium to Boeing.

The sell-side is bullish on both companies, with expectations of continued growth resulting in a five-year PEG ratio of 0.8 in each case. While we’d certainly avoid taking these projections at face value, the recent results do suggest that B/E Aerospace and Spirit could be worth further research.

Embraer’s earnings were down significantly in its most recent quarter compared to the same period in the previous year despite higher revenue. So in that case, the expected increase in its earnings per share over the next year and a half in part represents analysts’ expectations of a recovery at the company. Still, it’s probably best to wait for Embraer to actually show some of these improvements.

TransDigm is in a similar position in terms of its recent financials; that stock is also the highest-priced of this peer group on a forward earnings basis with a P/E multiple of 18. As such, we don’t think that it is a good buy.

Bottom line

Viking Global wasn’t the only hedge fund we track buying into Boeing last quarter; in fact, we see a lot of new positions in the stock when we look at our database. With the stock not being a clear value, the investment thesis has to be that aircraft orders are going to pick up strongly and drive high earnings growth over the next several years -- higher, in fact, than Wall Street analysts are currently expecting. While we wouldn’t rule that out as a possibility, and think that investors should keep an eye on Boeing, it seems like a bit of a speculative reason to buy at this time.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Embraer-Empresa Brasileira, Spirit AeroSystems Holdings, and TransDigm Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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