What’s Priced into Boeing’s Current Valuation?
As of April 17, 2017, Boeing (BA) has a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 13.8x. This is higher than its average multiple of 8.8x since February 2008. The market is expecting BA’s EBITDA to rise 51% in 2017.
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As can be seen from the chart above, Boeing has mostly traded above the industry median since 2008. Peers used in the industry median calculation include Lockheed Martin (LMT), United Technologies (UTX), General Dynamics (GD), Rockwell Collins (COL), and Raytheon (RTN). However, these companies aren’t strictly comparable.
What should investors track?
Aircraft orders have been in a declining trend since 2014 due to multiple factors. By 2014 a lot of airlines had already placed orders for all their new aircraft requirements. Another important factor was the decline in crude oil prices that started in mid-2014. As fuel costs fall, the necessity to replace old aircraft with more efficient ones fall, leading to declining airline orders. Weak economies around the world further subdued the industry’s prospects.
In the short term, valuation multiples will depend on Boeing’s ability to ramp up its 787 production, reduce costs, and improve margins. Its ability to hold its ground against Airbus and Bombardier will also be a key driver for the company.
However, long-term growth will be impacted by economic growth, which affects air travel demand and airline fundamentals.
Boeing forms ~5.8% of the Dow Jones Industrial Average ETF (DIA).