Large capitalization stocks (usually ranging from $50 to $100 billion in size) tend to move very slowly, sort of like a tanker ship trying to turn its course, as opposed to a speedboat trying to corner a turn at high speeds. Boeing (NYSE: BA) is one such stock, a giant in the industry with a valuable brand name to support its price action.
Today, the story changes as shares of Boeing are rising by as much as 6.4% in the morning hours of Wednesday's trading session. The initially bullish reactions come as investors and markets digest the latest quarterly earnings results, which blew past expectations to place the company into a new expansionary path.
After being in an official bear market (defined as a 20% retracement from all-time or recent highs), Boeing stock could be setting up to break a near five-year price action spell; perhaps investors will see a near double in the coming months. As bullish as this assumption may seem, markets are pointing toward this scenario carrying high probabilities, backed by expanding financials.
Understanding the Playing Field
Boeing stock reached an all-time high price of $446.01 back in the first half of 2019 and has suffered from a bear winter ever since, though this may be about to change. Today the stock has not only touched but also crossed with significant momentum, its 200-day moving average level.
Understanding what this means can begin to lay the foundation for what could become a monster rally in Boeing stock. Typically, the 200-day moving average acts as a secondary proxy for bull or bear markets when a stock goes above and below it. Crossing above it with as much momentum as seen today can be taken as a majorly optimistic signal by investors.
The above image shows the entire cycle for Boeing stock, from a sleepy period before a more than 100% rally before 2019 down to today's directionless behavior. The purple line across the white price bars will represent the 200-day moving average; as investors can see, the past quarter has been summed up into a battle attempting to rise above, one that has been won today.
Taking this performance by itself is excellent, but it does not express whether Boeing is rising above competitors as much as it is rising above itself. In comparison, looking at another household name like Lockheed Martin (NYSE: LMT) can add bullish sentiment for investors still wondering about Boeing.
Boeing stock has outperformed this close competitor by as much as 31% during the past twelve months, a massive gap pointing to which of the two stocks is the most popular in the eyes of the market today. Furthermore, forward-looking valuation metrics, such as the forward P/E, also provide a reliable gauge of what may be expected.
By valuing the next twelve months of expected earnings via the forward P/E ratio, investors can determine where the perceived growth and quality are within a given sector. Boeing stock trades today for a 43.9x forward P/E, while Lockheed stock trades for an inferior 16.2x.
Value investors may begin to argue that this only makes Boeing more expensive than the alternative; however, this market willingness to pay a premium for each dollar of future earnings should not be taken lightly. Taking the newfound momentum in the stock, alongside financial results, can piece together the 'why' behind this market viewpoint.
Expanding Financials
Free cash flow is the lifeblood of any business since it enables management to reinvest in the company via avenues like debt repayments, acquisitions, and share buybacks. Today, Boeing has flipped its free cash flow figures on their head, going from negative $182 million a year ago to today's $2.5 billion.
The earnings report only gets better from there; revenues beat estimates by advancing 18% during the year. This growth is backed by a similar margin expansion, where gross margins grew from 8% to 10% as efficiency initiatives took effect. Boeing also used some of this new free cash flow and some of the existing cash balances to reduce the company's debt burden by a hefty $3.1 billion.
Deliveries for the aircraft maker grew by an astonishing 12%, pushing the CEO's target to generate as much as $10 billion in free cash flow by 2025. Management commented that "... We are well positioned to meet the operational and financial goals we set for this year and for the long term," reiterating confidence that these targets will be met.
Investors can now bet on the perfect storm when weighing their potential decision toward a purchase in Boeing stock, technicals and fundamentals seldom shake hands and agree on a direction for a stock, but not today. Boeing's stars have aligned at the right time for a summer vacation.
