Boeing's KC-46 leads the way -- all the way to Japan.
(Image source: Boeing)
America's defense contractors have a lot of customers, and in a lot of different countries. One of the most important of these is Japan.
I know that in theory, Japan's "military" is "only" a self-defense force, but it's a big one. With an annual defense budget measured in the tens of billions, Japan has ranked as the world's 16th-largest weapons importer over the past 15 years. What's more, last year, Japan "reinterpreted" Article 9 of its Constitution to permit various forms of cooperation with military allies -- and in ways formerly verboten to the Self-Defense Forces.
Already, the effects of that reinterpretation are making themselves felt. And pretty soon, they should become visible on Boeing's bottom line.
Extending Japan's wings
Last month, in one of its regular "notifications" to Congress, the U.S. Defense Security Cooperation Agency (DSCA) announced that the Government of Japan has requested permission to buy four KC-46A "Pegasus" aerial refueling aircraft from Boeing.
According to DSCA, selling these tankers to Japan will not "affect the basic military balance in the region." It will, however, improve "Japan's capability to participate in Pacific region security operations," improve "Japan's national security posture," and "provide Japan a needed capability to a close ally and support U.S. security interests in the region" -- as is now permitted by the reinterpretation of Japan's Constitution Article 9.
Including electronics equipment from Raytheon, missile defense accoutrements from Northrop Grumman, and engines from United Technologies, the total value of the contract is expected to be $1.9 billion -- with Boeing acting as prime contractor.
|Market capitalization||$82.5 billion|
|Net profit||$3.7 billion|
How does a value investor use numbers like these to determine if a stock like Boeing is worth buying? Start by adding the company's projected growth rate to its dividend yield. These two numbers combined give you the "total return" you're expecting on an investment in Boeing: 15.8%.
Ideally, you want to buy the stock when its price-to-earnings or its price-to-free cash flow ratio (or even better, both) are equal to or less than that total return number. Currently, Boeing's P/E ratio fails this test. But its price-to-free cash flow ratio -- actually, the valuation metric that I prefer -- passes with flying colors.
Moreover, I can't help noticing that Boeing's price-to-sales ratio, which I've found especially useful for finding bargain stocks in the aerospace and defense industry, is currently clocking in well below the 1.0-times-sales rule of thumb for fair value.
The upshot for investors
In my book, I'm scoring Boeing at "two out of three ain't bad" on these valuation metrics. Boeing's GAAP-derived P/E ratio looks a bit high -- due, in part, to all the writedowns that Boeing has been forced to take on the KC-46 project. But its low P/FCF and P/S ratios, combined with a respectable growth rate and strong dividend yield, tell me that investors are underestimating the value in Boeing stock today.
(Rich Smith - The Motley Fool)