Flying in Comfort and Peace
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I wish I had a solar-powered flying machine that can carry hundreds and looks like that giant airship from Batman: The Animated Series. It was the one that had a bar, fancy restaurant, and dance floor in the front section. So, it’s time to figure out how to pay for that. Could companies that make a jet-powered airship allow you to buy one for yourself? I'm going to go out on a limb and say no. I just don’t think it would be practical. That does invalidate the companies that make engines, planes, and many other products, including ones not dealing with aviation?
Boeing (NYSE: BA) is probably a name known to all. Other than the Dreamliner, there are not really drastic new innovations in planes. I suppose the switch from aluminum to plastic composites is pretty important. For as long as I can remember, airplane skin has been made of aluminum. I have to remember to research the impact on Alcoa if this is the new trend for airlines, but yet I digress. However, other than the new stretched Dreamliner, there are not many developments on the physical product front.
A company that makes planes obviously locks in orders in advance. There are 523 ordered units for the original 787-8s, and already 315 of the 787-9s that have not flown yet. The first delivery is scheduled to take place in early 2014. That does not seem like a horrible order book. Especially because some of these are firm orders with the option to purchase more. At least the American Airlines order has that feature.
Boeing seems like a strong company, although the stock performance may not show this. First, do not worry about the profit margin of 4.83%. Boeing is basically a manufacturer, and manufacturers tend to have lower margins. The margins are consistent with Boeing's past, though a few percentage points upward are possible. The debt-to-equity ratio is really not an issue as well, because planes are huge. I imagine that the manufacturing equipment is big and expensive. In all seriousness, manufacturers tend to have high debt. Cash is not much less than long-term debt. Since Boeing is profitable, it is fine that cash is about $1B less than long-term debt.
Year-over-year revenue growth has been impressive the last three-quarters. Starting with the quarter ending December 2011, it has been 18.16%, 30%, and 20.93%. You have to imagine that Boeing's plane sales are driving growth, mostly because that is its only business. The $4B in net income ttm is good. For Boeing, I want to move away from my normal look at free cash flow and simply look at cash flow from operations. With the Dreamliner, and the constant pressure to make planes better, more fuel-efficient, and turn them out of the factories faster, Boeing uses its cash. Cash flow from operations is $5.125B for the trailing twelve months. Having that liquidity is a good thing as Boeing moves to fill the orders in its book.
Boeing has a dividend yield of 2.4% and its 3-year return is 46.18%. That's pretty good if you judge the stock by its total return. I do not expect the yield to be increased drastically, unless the price falls. On a side note, prices falling after you buy is a bad thing.
Lockheed Martin (NYSE: LMT) is up next on my list. I know, Airbus would have been a more on point thematic choice. However, I would rather look at military aviation as the next step. Maybe next time I will do Airbus and Northrop. With government spending on the chopping block, is there much hope for Lockheed to outpace the market in any substantial way? US defense spending is pretty hard to cut, but even stagnation is not good. Also, the appetite for flashy new military hardware that is not useful in non-traditional wars might have lost its appeal. Firebombing cities is immensely less popular now than it was in World War II.
Lockheed has a nice dividend yield at 4.90%. This may skew the total return though. Lockheed could be hit hard if there are cutbacks. Do not get dividend fever about this company. Judge it without the dividend then use the dividend to sweeten the deal. It can push a slight no to a yes, and a slight yes to a definitely. If Lockheed is going to have a precipitous fall then it has no business being in a portfolio. The debt-to-equity ratio of 2.946 seems like a bit high, though it was around 6.5 at the end of 2011. It seems to be a recent phenomenon that is being corrected. Net income, cash flow from operations, and cash on hand are all healthy so the focus should be on future hurdles.
My idea of Lockheed as a company must be skewed. With a price-to-book ratio of over 13, I would look somewhere else. To reinforce this, the PEG ratio is over 1 as well. The reason the book value bothers me is, because a company that researches and manufactures should have more assets on its books. I suppose that does not matter as long as the company is producing cash, but I question whether the stock price can increase from these levels with defense cuts looming. I should note this might affect Boeing too, but I feel that Lockheed relies more on government spending.
I think it might be prudent to hold off on Lockheed despite the dividend. Wait for the election, and to get an idea of what Congress plans on doing. Then if Lockheed gets slammed, you can consider jumping in, because I do not think it will be as bad as the market decides it will be. Prudence is called for here, but only for a bit. The United States and defense spending have a long history. A history that is lucrative for the right companies.
Lockheed will remain a defense industry beacon for a long time. The announcements of cuts could push down both companies. That might be the time to pounce, probably not on both unless your portfolio is large. You have to come down on the side of civilian aviation or military aviation.
TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of Lockheed Martin. 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.If you have questions about this post or the Fool’s blog network, click here for information.