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Qi Jie asked 3 years ago

With the recent incident about Boeing 737 Max, I see this may be an opportunity to purchase into Boeing. However, I have some uncertainty. 
Is boeing consider a cyclical stock? I know airline is cyclical. However, how about manufacturer of commercial airplanes? From what I know is duopoly, with Airbus being the other competitor. Boeing is also the leading aircraft manufacturer compare to Airbus.
I did some analysis on Boeing for FY2018, Commercial Airline accounts 61% of their revenue, follow by Defence Space and Security, 23%. Out of this 23% roughly around 80% or so of their revenue comes from the United States of Defence. 
Global Services is around 16% where they provide product and services solutions, such as modification of aircraft, selling of spare parts, data analytics and information base services for commercial and gov.
Lastly Boeing Capital, < 1% revenue, which I shall skip. 
For FY2018, they have around 5900 backlog orders, which is roughly 7 years worth of production. This could be argue that the revenue is predictable. (There may be still risks of cancellations)
However, one could also say Boeing is cyclical as they depend on the current economy. Let’s say there is an economy crisis next year, and this could definitely affect their future orders of new aircraft. So how should I look at Boeing? Cyclical or no?
For the risks, one of the most recent could be the tariffs with China, on steel and aluminium which could bump up their cost of productions. 
Next, for the valuation of Boeing, is it recommended to look at avg PE of past 10 years? Currently Boeing is trading around 20 PE. 
Currently I feel that Boeing is fairly price and there is a decent moat for Boeing and future growth.
Also Buffet mention, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
 
May I also know what are your thoughts on Boeing or is there any insights u may want to add-ons?
 
Thank you. 

2 Answers
Victor Chng answered 3 years ago

Hi Qi Jie,
 
Personally, I will view Boeing as a cyclical stocks despite them having the order book for 7 years. 
 
When analysing them it is important to find out the following valuation:
 
1.Historical High PE
2.Historical Low PE
3.Average PE
 
The key is to try to buy near to the historical low PE not the average as the company is cyclical in nature.
 
 

Qi Jie replied 3 years ago

Regarding about the historical PE, if I based on let’s say 15 years result, is as low as 8. If past 10 years is 10, and if past 5 years is around 15. So what is the time frame or period would you recommend? Since it is almost impossible to have PE of 8, I am thinking if past 5 years is sufficient? Maybe around 15?

Victor Chng answered 3 years ago

Hi Qi Jie,
 
For cyclical companies, 5 years data is not enough because you need to find out how the company performed during the cyclical high and the cyclical low. When cyclical comes turn, it will move very fast hence I will not say PE 8x is not impossible.

Qi Jie replied 3 years ago

Ok noted, thanks alot Victor!