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The share price gains in Boeing (NYSE: BA) have been nothing short of breath-taking. Since February 2013, BA shares have jumped 340%, while in the past 12 months, the world's largest commercial aircraft maker's stock accelerated its rise with a 111% return. This latest surge leaves three of the fabled FANG stocks in the rearview mirror (Netflix narrowed edged Boeing with a 114% return), humbling even second-best Amazon's relatively meager 60% gain.
Fueling Boeing certainly hasn't been revenue growth, up only 12% since 2012. Nor has it been earnings growth--as core earnings per share increased only 70% over this five-year period, to a likely $10.00 for 2017. The 39% boost in operating cash flow, which avoids some of Boeing's complex accounting, from about $9 billion in 2013 to a likely $12.5 billion this past year, doesn't fully explain the shares' stratospheric lift, either.
The biggest source of growth appears to have been the rising confidence that Boeing's future features clear skies as far as the eye can see. Much of this enthusiasm is justified, best stated by Alexandre de Juniac, head of IATA, the primary trade association for the global airline industry, Boeing's principal customer base:
"These are good times for the global air transport industry. Safety performance is solid. We have a clear strategy that is delivering results on environmental performance. More people than ever are traveling. The demand for air cargo is at its strongest level in over a decade. Employment is growing. More routes are being opened. Airlines are achieving sustainable levels of profitability."
With its solid $474 billion backlog that equates to over 7 years of commercial aircraft production, combined with the impressive strength and stability of its Global Services profits, Boeing looks poised to deliver a steady stream of $10 billion or more in annual free cash flow for years to come. Helping matters is the recently passed tax law, which heavily favors Boeing with a lower tax rate plus full deductibility of its equipment spending. Even the recent increase in oil prices, which might be seen as crimping Boeing customers' profits, provides a tailwind by boosting the demand for new, fuel-efficient jets.
How much blue sky is priced into Boeing shares? Currently, BA's valuation is about 16x estimated 2018 EBITDA1 and 28x estimated 2018 earnings per share--no bargain there. Even if profits continue to grow, the valuation on 2021 EBITDA declines to a still-generous 12x. In the sometimes-odd calculus of earnings multiples for cyclical companies, high multiples can represent bargains when earnings are at their trough. But when earnings are approaching their peak, paying these multiples can be hazardous to returns.
The rest of the story?
As investors begin to assume a robust future, and analysts race to boost their price targets, perhaps they have glossed over the rest of Mr. de Juniac's comments: "It's still, however, a tough business, and we are being challenged on the cost front by rising fuel, labor and infrastructure expenses."
While the IATA expects the global airline industry to produce a record $66.9 billion in operating profits this new year, these rising costs, along with higher interest rates, might add some haze to the otherwise bright outlook for new plane demand. And, the IATA chief didn't mention the industry's highly cyclical nature. At the prior cycle peak, in 2007, airline industry profits were a mere $19.9 billion, hardly enough to justify fleets of new jets if we return to that level in the future.
A reappearance of cloudy skies would certainly dampen the spirits of growth and momentum investors, who might quickly look for the nearest emergency exit. Gravity's renewed effect on Boeing's share price would perhaps be unpleasant. Despite efforts to the contrary, the business cycle hasn't been repealed. Boeing shareholders may want to keep a parachute handy, or at least make sure their seat belts are fastened and their folding trays are in their upright position.
1 EBITDA, or earnings before interest, taxes, depreciation and amortization, which is a measure of cash operating profits.