The Boeing Company designs, develops, sells and services aerospace/defense products. The company belongs to industrial goods sector. It has five business segments: Boeing Military Aircraft, Commercial Airplanes, Global Services & Support, Network & Space Systems, and Boeing Capital. The Commercial Airplanes segment manufactures and services commercial airline where Boeing Military Aircraft manufactures and services military airline. The Network & Space Systems segment researches, develops, and modifies electronics and information solutions; tactical missile and defense systems; and space study products. The Global Services and Support segment provides integrated logistics; maintenance, and improvements for aircraft; and training system. The Boeing Capital segment facilitates financing solutions.
Financial Performance Analysis in 2013
The Boeing Company had sufficient short term assets to service its short term obligations in 2013. However the company maintains below average short term assets compared to its comparable companies. Average collection period of the company is lowest among its close competitors implying its sales efficiency. This quick sales collection also allows the company to free up additional capital to investment in some other areas and ensure efficient allocation of resources.
Intrinsic Value
Dividend of the company increased at an average rate of 5.0% in the last three years.
Average five years return of the S&P 500 index was 16.7%. We considered 10 year US Treasury Bond yield as our risk free rate of return. 10 year US Treasury Bond yield as on June 20, 2014 was 2.63%.
Market sensitivity of the Boeing company was 1.05 (Source: Value Line). It implies that the stock of the company moves 1.05 times of the market movement. Using CAPM, we can find the required rate of return of the company at 17.4%. Considering the historical 3 years dividend growth rate as perpetual growth rate, the intrinsic value of the company stands at USD 16.41 using the Gordon constant growth model. The stock of the company traded at USD 130.75 as on June 20, 2014. As the intrinsic value of the company is lower than market value, the stock seems to trade overvalued in the marketplace.
Relative Value
Earnings per share of the company increased at an average rate of 10.8% in the last three years.
Average P/E ratio of the peer companies was 16.41x. Taking the average P/E multiples as the benchmark for the company and EPS increased at the rate of average three years growth rate as forward EPS, relative value of the company stands at USD 110.98. As the relative value of the company is higher than market value, the stock can be considered as undervalued in the market.
United Technologies Corporation
United Technologies Corporation provides aerospace/defense products & services worldwide. The company belongs to industrial goods sector. The company operates in several business segments such as Otis segment; UTC Climate, Controls, & Security segment; Pratt & Whitney segment; UTC Aerospace Systems segment; and Sikorsky segment.
Financial Performance in 2013
United Technologies Corporation had sufficient liquidity to finance its short term obligations in 2013 though it was below industry standard. Its average collection period was on the higher side. So the company had to invest extra capital to finance its short term working capital. The company was average in using its assets in generating revenues. Return on sales was also on the lower side among its peer groups. Accordingly the company got industry average P/E multiples in the marketplace.
Intrinsic value
Dividend of the company increased at an average rate of 9.0% in the last three years.
The market sensitivity of the stock was almost equal to market as implied by beta 1.05. Using CAPM, we can find the required rate of return of the company at 17.4%. Considering the historical 3 years dividend growth rate as perpetual growth rate, the intrinsic value of the company stands at USD 28.44 using the Gordon constant growth model. The stock of the company traded at USD 117.23 as on June 20, 2014. As the intrinsic value of the company is lower than market value, the stock seems to trade overvalued in the marketplace.
Relative value
Earnings per share of the company increased at an average rate of 9.8% in the last three years.
Average P/E ratio of the peer companies was 19.64x. Taking the average P/E multiples as the benchmark for the company and EPS increased at the rate of average three years growth rate as forward EPS, relative value of the company stands at USD 134.73. As the relative value of the company is higher than market value, the stock can be considered as undervalued in the market.
Honeywell International Inc
Honeywell International Inc. is a diversified technology and manufacturing company operating worldwide. The company was established in 1920 and is headquartered in Morris Township, New Jersey. The company operates in different segments such as Aerospace segment; Automation and Control Solutions segment; Performance Materials and Technologies segment; and Transportation Systems segment.
Financial performance in 2013
Current ratio of the company was average among its peer group in 2013 and the current assets was sufficient to service its short term obligation at that period. Average collection period of the company was on higher side among its comparable companies in 2013 requiring the company to channel a significant portion of its short term assets to finance its accounts receivable. The company did not find above average efficiency in utilizing its assets in that time period, though return on equity was satisfactory at that time period. Accordingly the company got average P/E multiples in the market.
Intrinsic Value
Dividend of the company increased at an average rate of 11.6% in the last three years.
The market sensitivity of the stock was almost equal to market as implied by beta 1.15. Using CAPM, we can find the required rate of return of the company at 18.8%. Considering the historical 3 years dividend growth rate as perpetual growth rate, the intrinsic value of the company stands at USD 25.87 using the Gordon constant growth model. The stock of the company traded at USD 94.09 as on June 20, 2014. As the intrinsic value of the company is lower than market value, the stock seems to trade overvalued in the marketplace.
Relative Value
Earnings per share of the company increased at an average rate of 25.2% in the last three years.
Average P/E ratio of the peer companies was 19.54x. Taking the average P/E multiples as the benchmark for the company and EPS increased at the rate of average three years growth rate as forward EPS, relative value of the company stands at USD 120.33. As the relative value of the company is higher than market value, the stock can be considered as undervalued in the market.
Danaher Corp.
Danaher Corp. is a diversified machinery company operating worldwide. It was founded in 1969 and controls its worldwide operation from Washington, District of Columbia. The company operates several business segments such as Test & Measurement segment; Life Sciences & Diagnostics segment; Dental segment; and Industrial Technologies segment.
Financial Performance in 2013
Current ratio of the company implies that its current assets was about two times of its current liabilities requiring significant capital investment in the working capital. Average collection period was also very long of the company. However, return on sales was very strong for the company in 2013. The company got the highest P/E multiples in the marketplace.
Intrinsic Value
Dividend of the company increased at an average rate of 7.9% in the last three years.
The market sensitivity of the stock was almost equal to market as implied by beta 1.05. Using CAPM, we can find the required rate of return of the company at 17.4%. Considering the historical 3 years dividend growth rate as perpetual growth rate, the intrinsic value of the company stands at USD 1.13 using the Gordon constant growth model. The stock of the company traded at USD 80.43 as on June 20, 2014. As the intrinsic value of the company is lower than market value, the stock seems to trade overvalued in the marketplace.
Relative value
Earnings per share of the company increased at an average rate of 13.0% in the last three years.
Average P/E ratio of the peer companies was 18.56x. Taking the average P/E multiples as the benchmark for the company and EPS increased at the rate of average three years growth rate as forward EPS, relative value of the company stands at USD 80.06. As the relative value of the company is lower than market value, the stock can be considered as overvalued in the market.
Risk, Return and Covariance Analysis
Return range of both United Technologies Corporation and Honeywell International Inc were shorter among the four selected stocks implying low volatility. As we can see, the stocks having high volatility does not always have high standard deviation.
The covariance matrix shows that correlation among these four selected stocks are near 0. So the stocks as a whole in a portfolio will provide good diversification in the portfolio.
Recommendation
Stocks of Boeing and Honeywell looks to have significant upside potential considering the relative valuation of these four stocks. United Technologies Corporation also has some upside potential. But Danaher Corp. looks overvalued in the marketplace. So clients can take position in Stocks of Boeing and Honeywell as well as United Technologies Corporation, if they desire to do so.
References
(n.d.). Retrieved 2014, from Morning Star: http://financials.morningstar.com/ratios/r.html?t=STLD®ion=usa&culture=en-US
(n.d.). Retrieved 2014, from Value Line: http://www.valueline.com/
(n.d.). Retrieved 2014, from Yahoo Finance: http://finance.yahoo.com/q/hp?s=NUE+Historical+Prices
Yahoo Finance. (n.d.). Retrieved 2014, from http://finance.yahoo.com/q/pr?s=NUE+Profile
