Financial Performance and Ratios Analysis of the Boeing Company - Assignment Example

THE BOEING COMPANY Brief Company Overview The Boeing Company is a company engaged in the design, development, production, sale and service support of commercial jetliners, satelites, military aircraft, launch systems, and missile defense. In addition to these operations, Boeing Company offers training and support services as well as performance-based logistics services to the commercial airline industry worldwide (MarketLine Advantage, 3). There are six business segments through which the Boeing Company operates: (1) commercial airplanes; (2) Boeing military aircraft; (3) global services and support; (4) Boeing Capital; (5) network and space systems; (6) other (MarketLine Advantage, 4). Brief History of the Boeing Company The Boeing Company has a long history dating back to 1916, when the founder of the company, William Boeing launched a company Pacific Aero Products. The next year the company was renamed to Boeing Airplane and Transportation (MarketLine Advantage, 6). In 1929, the company’s name was changed again to United Aircraft and Transportation. By that time the company has significantly expanded its business operations and diversified into other business lines (such as airport’s maintenance and mail delivery (MarketLine Advantage, 6). In 1934 the antitrust legislation restricted ownership of mail-carrying airlines, and the company has divided its business into three entities: United Aircraft (manufacturing operations in the East of US), United Air Lines (air transportation) and the Boeing Airplane (manufacturing operations in the West of US) (MarketLine Advantage, 6). During the World War II, the Boeing Airplane Company concentrated on building of bombers. Since 1960’s the company has expanded its business significantly through numerous mergers and acquisitions, creation of new divisions, and expansion of business operations across the globe. Nowadays, the company serves customers in 150 countries across the globe and is recognised to be one of the largest defense contractors in the USA and one of the two major manufacturers of 100+ sear airplanes for commercial purposes (MarketLine Advantage, 4). Customers and Competition The Boeing Company serves a broad variety of customers, among which are both government and commercial entities. Some of the major government customers of Boeing Company are: the US Air Force, the US Army, US DoD, US Navy, NASA, US Defense Logistics Agency Aviation, Israel Aircraft Industries, UK Ministry of Defense, European Aviation Safety Agency, US Federal Aviation Administration, etc. (MarketLine Advantage, 4). Practically all major international airline companies use Boeing airplanes in order to carry out their services. These companies include but are not limited to: KLM Engineering and Maintenance, Air New Zealand, Thales Australia, Air China, Hong Kong Airlines, Aeroflot Russian Airlines, Cathay Pacific Airways, Korean Air, GE Capital Aviation Services, Turkish Airlines, Lufthansa, Norwegian Air Shuttle, American Airlines, Emirates Airline, etc. (MarketLine Advantage, 4-13). The company faces competition in global scales and on behalf of many different companies, operating in airline industry. Some of the major competitors of the Boeing Company include the following: BAE Systems Plc, Raytheon Company, Textron Inc., Bombardier Inc., Embraer S.A., Northrop Grumman Corporation, and others (MarketLine Advantage, 47). In aircraft and component manufacturing, the Boeing Company has one strong competitor, the European-based Airbus SAS, headquartered in France. Thus, for example, in 2013, Airbus got orders for more than 1500 new aircraft, while Boeing received 1, 355 orders for new aircraft (Key Note, 50). Information on top management and management compensation W. James McNerney Jr. has been appointed as a Chairman, President, and the Chief Executive Officer of the Boeing Company since 2005. He served as the President and CEO at GE Aircraft Engines, the Chairman at 3M Company and as the manager in General Electric Company (MarketLine Advantage, 27). His compensation in 2014 was $ 28,61, 929 (BA Boeing Co Executive Compensation, n.p.). Raymond L. Conner has been the Vice Chairman, President and CEO in Commercial Airplanes division since 2013. His compensation in 2014 was $ 16,421,314 (BA Boeing Co Executive Compensation, n.p.). Gregory D. Smith has been the Chief Financial Officer (CFO) and the Executive Vice President at Boeing since 2012 (MarketLine Advantage, 31). As of 2014, his compensation was $10, 579, 551, while in 2013, it was only $3, 596, 012 (BA Boeing Co Executive Compensation, n.p.). Dennis A. Muilenburg has been the Vice Chairman, President and Chief Operating Officer at the company since 2013. Before this position, he worked as the Executive Vice President and the CEO of Boeing’s Defence, Space and Security (BA Boeing Co Executive Compensation, n.p.). His compensation in 2014 was $11,798, 401 (BA Boeing Co Executive Compensation, n.p.). J. Michael Luttig has been the Executive Vice President and General Counsel at Boeing Company since 2009. Prior to this post, Mr. Luttig served as the Senior Vice President and General Counsel at Boeing (MarketLine Advantage, 32). His compensation in 2014 was $7, 448, 444 (BA Boeing Co Executive Compensation, n.p.). Total Executive compensation in the Boeing Company illustrates significant increase during the period from 2010 to 2014. In 2010, the total executive compensation was equal to 41.92 million, while by 2014 it reached 75.11 million (BA Boeing Co Executive Compensation, n.p.). Table 1. BA Boeing Co Executive Compensation (Source: Morningstar, n.p.) Summary of business strategy In 2013 the company has introduced a new business strategy also known as a ‘One Boeing’ strategy. This decision was triggered by the decline of U.S. budgets on aircraft, overall military stagnation and growth of commercial aviation sector (Sweetman, n.p.). New strategy aims to increase the scales of international operations and business and to reduce the costs generally. The Boeing Company’s strategy is to bundle high-volume commercial orders with low-volume defense and space orders (Sweetman, n.p.). Financial Performance and Ratios Analysis While analysing the financial performance of a company, it is possible to apply financial ratio analysis. There are identified four major categories of financial ratios, including the following: profitability, efficiency, liquidity, and financial gearing (Atrill and McLaney, 161). Below is presented financial ratio analysis of the Boeing Company. Profitability Ratios Profitability ratios are applied in order to evaluate how profitable is the company. Below are provided the following profitability ratios: return on equity (ROE), return on assets (ROA), and net profit margin for the Boeing Company. Financial ratios 2012 2013 2014 Return on Equity % 44.21 46.27 51.88 Return on Assets % 5.05 5.68 6.14 Net profit margin % 5.29 6.00 6.29 (Source: Morningstar, 2015). The company has a high ROE ratio, which illustrates continuous growth during the last three years. As of 2014, the Boeing Company returned almost 52% of its net income as a percentage of the shareholders’ equity. In this case, $0.52 of profit was generated for every $1 of shareholders equity (Atrill and McLaney, 170). The higher ROE is, the better it is for current shareholders and more attractive for potential investors as it means that the company generates high return. Return on Assets of Boeing in 2014 also was higher, compared to the previous years. As of 2014, the company’s ROA was 6.14%, which means that for every $1 invested by shareholders in assets generates $ 0, 6 of net income. The historical performance of the company indicates improvement in asset management and is a good sign for current and potential shareholders. Net profit margin of the Boeing Company also has been growing during the last three years. In 2012 net profit margin was 5,29% and in 2014 it was 6,29%. It means that for each dollar earned by the company $0,6 is translated into profits. While this profit margin might seem to be low compared to other publicly traded companies, it is currently ranked number 220 in S&P 500, number 10 in aerospace and defense industry, and number 17 in Capital Goods sector (Boeing (BA) Fundamental Analysis, Stock Research, Fundamental Ratios, n.p.). Efficiency ratios Efficiency ratios are applied in order to evaluate how effectively the company manages its resources (Atrill and McLaney, 179). Below are used the following profitability ratios: asset turnover and inventory turnover of Boeing Company. Financial ratio 2012 2013 2014 Asset turnover 0.95 0.95 0.98 Inventory turnover 1.82 1.71 1.67 (Source: Morningstar, n.p.). The asset turnover of Boeing is quite high and stable. By 2014, asset turnover ratio was close to 1, indicating that a company has a very asset management capability and its net sales are practically equal to the average total assets. It means that for every $1 invested in assets the company reached $0.98 of sales in 2014. The inventory turnover of the Boeing company has been decreasing during the past three years. While in 2012 it was 1.82, by 2014 it has fallen to 1.67. It means that the company’ inventory management capability is lower as it sold 1.67 times its inventory during 2014. However, it is important to take into consideration the nature of the products sold by the company as it is not fast-moving products. Liquidity ratios Liquidity ratios is a group of financial ratios which allows investors to assess how liquid are the company’s assets and whether the company’s resources are liquid enough in order to meet its debt obligations if necessary (Atrill and McLaney, 185). For calculating liquidity, there can be used the following ratios: current ratio and acid test ratio. Financial ratio 2012 2013 2014 Current ratio 1.27 1.26 1.20 Acid test ratio 0.42 0.37 0.32 (Source: Morningstar, n.p.). Current ratio of the Company has been slightly reduced since 2012. As of 2014 current ratio was 1.20 which means that the company has a good liquidity position and it is capable to pay out its obligations. The higher the current ratio is the easier it is for the company to get a loan or credit. Acid test ratio, also known as quick ratio shows how much of the quick assets the company has available for covering its liabilities. In 2014, the current ratio of the Boeing Company has decreased significantly compared to 2012 to 0.32. It means that the Boeing Company has only 1/3 of the quick assets in order to cover its current liabilities and it might be quite challenging to pay out its liabilities. Gearing ratios Gearing ratios are used in order to measure the business risks and to evaluate the extent to which a company uses borrowings for business operations (Atrill and McLaney, 188). For calculating gearing ratio, there are used two major ratios: the debt-to-equity ratio and dividend yield ratio. Financial ratio 2012 2013 2014 Debt-to-equity ratio 0.54 0.94 1.13 Dividend Yield % 2.45 (Source: Morningstar, n.p.). The debt-to-equity ratio of the Boeing Company has shown significant growth during the period from 2012 to 2014. It means that the company has increased its borrowings during the last two years. The company’s reliance on borrowings from creditors has increased together with the associated risks as now the company needs to pay out interest rate and debt. Dividend yield is the ratio used to evaluate how much a company pays out in dividends every year to its shareholders. In other words, it indicates how much cash an investor gets for each dollar in the form of dividends. Dividend Yield at the Boeing Company has been decreasing since 2012, which might not be a good sign for potential investors. As of 2014, the company’s dividend yield was equal to 2.45. The dividend yield of the Boeing Company was higher than the average ratio in the industry (2.06%) and therefore is a good sign for potential investors (Boeing Company (BA) Dividend Comparisons to Industry Sector And S&P, n.p.). Having analysed the financial ratios of the Boeing Company it is possible to say that the company is attractive for potential investors. It is quite efficient in terms of asset and inventory management, it has relatively good liquidity, and it is attractive for prospective investors in terms of the balance of profitability and risks. Cash flow analysis Cash flow analysis is useful in company’s stock analysis. As of 2014, Boeing had a positive net income cash flow of 5.45 billion (Boeing Cash Flow Statement Annual, n.p.). While analysing the company’s cash flow it is possible to use cash flow financial ratios, including the following: operating cash flow growth, free cash flow growth, and free cash flow/sales, Below are presented these cash flow ratios for the Boeing Company. Cash flow ratio 2012 2013 2014 Operating cash flow growth 86.63 8.94 8.30 Free cash flow growth 151.00 2.47 11.46 Free cash flow/sales 7.10 6.86 7.30 (Source: Morningstar, n.p.) Operating cash flow growth Operating cash flow helps to understand whether the company is able to generate enough positive cash flow in order to maintain its operations and grow the business (Investopedia, n.p.). In 2012, the Boeing company had a significant growth of the operating cash flow, indicating thus on the firms’ capability to grow business without attracting external investors. Free cash flow growth Free cash flow is an indicator, which shows how much cash the company is able to generate after paying its capital expenditures and other costs necessary for expanding the firm’s assets (Investopedia, n.p.). Therefore, the greater is the free cash flow, the more capability the company has to enhance the shareholder value. Free cash flow growth indicates whether the company increases this capability. Boeing Company has grown its free cash in 2014 compared with the preceding year, which means that it has increased capability to pursue market opportunities. Free cash flow/sales Free cash flow to sales ratio illustrates “the percentage of free cash flow to the amount of sales” (Investopedia, n.p.). It indicates how much does the company earn in reality. The Boeing Company has a positive free cash flow to sales ratio, which has grown in 2014. Valuation of the Boeing’s stock price – CAPM model The Capital Asset Pricing Model (CAPM model) is often used in order to evaluate the risk of financial investment (Schmee and Oppenlander, 439). There are applied the following variables: rates of return, systematic risk estimation (beta), and expected rate of return. This model is applied for the Boeing Company in order to evaluate the expected rate of return on the Boeing’s stock. Rates of Return Below is calculated monthly rates of return for the past five years.     Boeing Co. (BA)   t Date Price(BA, t) R(BA, t) Price(S&P 500, t) R(S&P 500, t)   Jan 31, 2010 60,60   1 073,87   1. Feb 28, 2010 63,16 4,92% 1 104,49 2,85% 2. Mar 31, 2010 72,61 14,96% 1 169,43 5,88% 3. Apr 30, 2010 72,43 -0,25% 1 186,69 1,48% 4. May 31, 2010 64,18 -10,81% 1 089,41 -8,20% 5. Jun 30, 2010 62,75 -2,23% 1 030,71 -5,39% 6. Jul 31, 2010 68,14 8,59% 1 101,60 6,88% 7. Aug 31, 2010 61,13 -9,67% 1 049,33 -4,74% 8. Sep 30, 2010 66,54 8,85% 1 141,20 8,76% 9. Oct 31, 2010 70,64 6,16% 1 183,26 3,69% 10. Nov 30, 2010 63,77 -9,13% 1 180,55 -0,23% 11. Dec 31, 2010 65,26 2,34% 1 257,64 6,53% 12. Jan 31, 2011 69,48 6,47% 1 286,12 2,26% 13. Feb 28, 2011 72,01 4,25% 1 327,22 3,20% 14. Mar 31, 2011 73,93 2,67% 1 325,83 -0,10% 15. Apr 30, 2011 79,78 7,91% 1 363,61 2,85% 16. May 31, 2011 78,03 -1,67% 1 345,20 -1,35% 17. Jun 30, 2011 73,93 -5,25% 1 320,64 -1,83% 18. Jul 31, 2011 70,47 -4,68% 1 292,28 -2,15% 19. Aug 31, 2011 66,86 -4,53% 1 218,89 -5,68% 20. Sep 30, 2011 60,51 -9,50% 1 131,42 -7,18% 21. Oct 31, 2011 65,79 8,73% 1 253,30 10,77% 22. Nov 30, 2011 68,69 5,05% 1 246,96 -0,51% 23. Dec 31, 2011 73,35 6,78% 1 257,60 0,85% 24. Jan 31, 2012 74,18 1,13% 1 312,41 4,36% 25. Feb 29, 2012 74,95 1,63% 1 365,68 4,06% 26. Mar 31, 2012 74,37 -0,77% 1 408,47 3,13% 27. Apr 30, 2012 76,80 3,27% 1 397,91 -0,75% 28. May 31, 2012 69,61 -8,79% 1 310,33 -6,27% 29. Jun 30, 2012 74,30 6,74% 1 362,16 3,96% 30. Jul 31, 2012 73,91 -0,52% 1 379,32 1,26% 31. Aug 31, 2012 71,40 -2,80% 1 406,58 1,98% 32. Sep 30, 2012 69,60 -2,52% 1 440,67 2,42% 33. Oct 31, 2012 70,44 1,21% 1 412,16 -1,98% 34. Nov 30, 2012 74,28 6,08% 1 416,18 0,28% 35. Dec 31, 2012 75,36 1,45% 1 426,19 0,71% 36. Jan 31, 2013 73,87 -1,98% 1 498,11 5,04% 37. Feb 28, 2013 76,90 4,76% 1 514,68 1,11% 38. Mar 31, 2013 85,85 11,64% 1 569,19 3,60% 39. Apr 30, 2013 91,41 6,48% 1 597,57 1,81% 40. May 31, 2013 99,02 8,86% 1 630,74 2,08% 41. Jun 30, 2013 102,44 3,45% 1 606,28 -1,50% 42. Jul 31, 2013 105,10 2,60% 1 685,73 4,95% 43. Aug 31, 2013 103,92 -0,66% 1 632,97 -3,13% 44. Sep 30, 2013 117,50 13,07% 1 681,55 2,97% 45. Oct 31, 2013 130,50 11,06% 1 756,54 4,46% 46. Nov 30, 2013 134,25 3,25% 1 805,81 2,80% 47. Dec 31, 2013 136,49 1,67% 1 848,36 2,36% 48. Jan 31, 2014 125,26 -8,23% 1 782,59 -3,56% 49. Feb 28, 2014 128,92 3,50% 1 859,45 4,31% 50. Mar 31, 2014 125,49 -2,66% 1 872,34 0,69% 51. Apr 30, 2014 129,02 2,81% 1 883,95 0,62% 52. May 31, 2014 135,25 5,39% 1 923,57 2,10% 53. Jun 30, 2014 127,23 -5,93% 1 960,23 1,91% 54. Jul 31, 2014 120,48 -5,31% 1 930,67 -1,51% 55. Aug 31, 2014 126,80 5,85% 2 003,37 3,77% 56. Sep 30, 2014 127,38 0,46% 1 972,29 -1,55% 57. Oct 31, 2014 124,91 -1,94% 2 018,05 2,32% 58. Nov 30, 2014 134,36 8,15% 2 067,56 2,45% 59. Dec 31, 2014 129,98 -3,26% 2 058,90 -0,42% Average:  1.68%  1.18% Standard Deviation:  6.05%  3.73 (Stock Analysis on Net,. Boeing Co. (BA), n.p.). Taking the average indicator it is possible to see that the rate of return of the Boeing stock is higher than the average industry rate of return, which means that it the Boeing’s stock is quite attractive in terms of profitability. Systematic Risk Estimation Variance(BA) 36,54 Variance(S&P 500) 13,95 Covariance(BA, S&P 500) 15,81 Correlation Coefficient(BA, S&P 500) 0,70 β(BA) 1,13 α(BA) 0,34 (Stock Analysis on Net,. Boeing Co. (BA), n.p.). While estimating a systematic risk it is possible to evaluate how the price for Boeing stock changes and compare it with the changes of stock market as a whole. Boeing stock has a beta of 1.13, it means that if the market will rise or fall by 10%, the stock price will rise or fall by 13%. Expected Rate of Return Expected rate of return on market portfolio 13,85% Systematic risk (β) of Boeings common stock 1,13 Expected rate of return on Boeings common stock 15,31% (Stock Analysis on Net,. Boeing Co. (BA), n.p.). Expected rate of return on Boeing’s common stock is 15.31%. The rate of return is higher than the expected rate of return on market portfolio, which means that the Boeing stock is a quite attractive investment option. Overview of political & economic risks The Boeing Company does not operate in vacuum and the external environment plays a huge role. In order to make better strategic and investment decisions it is critical to analyse the current risks relevant to the business. Below is provided brief overview of key risks. The company operates in such an industry where political issues play a critical role in business. Any political tensions and conflicts could have negative impact on the airline industry and thus on the Boeing as its clients are airlines and governments. Any adverse government policies and restrictions related to air travel and airline industry would impose a risk on the company. In addition to economic risks the company faces substantial economic risks. Major economic declines reduce the buyer’s purchasing capability and therefore, demand for airline services and aircraft is lower. Boeing Company is a company operating worldwide and thus it serves customers from different countries. This aspect allows the company to diversify its operations and mitigate potential risks. Another important economic factor, which influences company’s financial performance is taxation. Increased taxes related to aircraft and airline industry could have adverse effect on the overall Boeing performance. Conclusion and recommendations The Boeing Company is a financially healthy company, which is attractive for many potential investors. The short-term and long-term outlook for business is good and favorable as the company has a diversified business production line and its major risks are diversified widely. However, there are some risks that can not be managed by a company. It is forecasted that the industry will grow and the Boeing company will have more opportunities for business development as the number of airline companies will want to replace their aging fleets with fuel-efficient aircraft. Therefore, it is important to focus on research and development and production of the most popular models such as Boeing 787, 737 and 777 (Value Line Publishing, 1). Works Cited: Atrill, Peter, and E. J McLaney. Accounting And Finance For Non-Specialists. Harlow: Financial Times Prentice Hall, 2006. BA Boeing Co Executive Compensation. N.p., 2015. Insiders.morningstar.com,. Web. 17 June 2015. Boeing (NYSE:BA) Cash Flow Statement(Annual) 2014,2013,2012 At Amigobulls. N.p., 2015. Web. 18 June 2015. Boeing (BA) Fundamental Analysis, Stock Research, Fundamental Ratios - Csimarket. N.p., 2015. Web. 18 June 2015. Available at: http://csimarket.com/stocks/fundamentals_glance.php?code=BA Boeing Company (BA) Dividend Comparisons To Industry Sector And S&P. N.p., 2015. Web. 18 June 2015. Available at: http://csimarket.com/stocks/Dividends.php?code=BA Growth, Profitability, and Financial Ratios For Boeing Co (BA) From Morningstar.Com. N.p., 2015. Web. 18 June 2015. Investopedia,. Operating Cash Flow (OCF) Definition | Investopedia. N.p., 2003. Web. 18 June 2015. Available at: http://www.investopedia.com/terms/o/operatingcashflow.asp Investopedia,. Free Cash Flow To Sales Definition | Investopedia. N.p., 2009. Web. 18 June 2015. Available at: http://www.investopedia.com/terms/f/free-cash-flow-to-sales.asp KeyNote. “The Airline Industry.” June 2014. Key Note Reports MarketLine Advantage. "The Boeing Company.” Nov. 2014. Business Source Premier. Web. 17June 2015. Schmee, Josef, and Jane E Oppenlander. JMP Means Business. Cary, N.C.: SAS Institute, 2010. Print. Stock Analysis on Net,. Boeing Co. (BA) | CAPM. N.p., 2015. Web. 18 June 2015. Available at: https://www.stock-analysis-on.net/NYSE/Company/Boeing-Co/DCF/CAPM Sweetman, Bill. Boeing Building On ‘One Boeing’ Strategy | AWIN Content From Aviation Week. Aviationweek.com. N.p., 2013. Web. 17 June 2015. Read More