Here’s Why Boeing Stock Is A Better Pick Over Its Industry Peer

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BA: The Boeing Company logo
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The Boeing Company

We believe that Boeing stock (NYSE: BA) is a better pick than Northrop Grumman stock (NYSE: NOC), given its better prospects. Although Northrop Grumman is the more expensive of the two, trading at 2.3x trailing revenues compared to 1.8x for Boeing, this valuation gap is largely justified given Northrop Grumman’s superior revenue growth and profitability, as discussed below.

Looking at stock returns, Northrop Grumman has significantly outperformed Boeing and the broader indices. While NOC is up 37% YTD, BA is down 8%, and the S&P500 index is down 19%. Boeing is reportedly close to signing a massive 200-airplane deal with Air India, and this development will likely be a positive for the stock. [1] There is more to the comparison, and in the sections below, we discuss why we believe BA stock will offer better returns than NOC stock in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Boeing vs. Northrop GrummanWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Northrop Grumman’s Revenue Growth Has Been Better Over The Recent Years

  • Both Boeing and Northrop Grumman have seen a decline in revenue over the last twelve months. While Boeing’s sales are down 2.2%, Northrop Grumman’s sales declined 5.5% over this period.
  • However, looking at a longer time frame, Northrop Grumman has fared better, with its sales rising at an average growth rate of 6% to $35.7 billion in 2021, compared to $30.1 billion in 2018, while Boeing saw its revenue decline at an average rate of -13.7% to $62.3 billion in 2021, compared to $101.1 billion in 2018.
  • The revenue decline for Boeing can primarily be attributed to the impact of the 737 Max grounding in 2019 and the Covid-19 pandemic on the company’s businesses, given that commercial airlines was one of the worst-hit sectors during the coronavirus crisis. Commercial Airplanes was the largest segment for Boeing, accounting for 57% of total sales in 2018, but the contribution dropped to 31% in 2021.
  • Boeing, over the recent past, has struggled to ramp up its production, impacting its deliveries. Supply chain disruption and labor issues for some suppliers further added to its woes.
  • Northrop Grumman’s space segment has observed substantial growth in recent years driven by higher strategic missile sales. Notably, the company’s order backlog almost doubled in recent years, from $42 billion in 2017 to $80 billion currently, driven by growing demand for space systems.
  • The ongoing Ukraine-Russia conflict has increased focus on the defense sector stocks. New business awards will likely drive the performance of defense-related companies in the near term, with possible increased defense spending, especially by NATO members.
  • Our Boeing Revenue Comparison and Northrop Grumman Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Boeing’s revenue is expected to grow slightly faster than Northrop Grumman’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 9.3% for Boeing, compared to an 8.5% CAGR for Northrop Grumman, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Northrop Grumman Is More Profitable

  • Northrop Grumman’s current operating margin of 22.2% is much better than -7.8% for Boeing.
  • This compares with 10.3% and -1.6% figures seen in 2019, before the pandemic, respectively.
  • Even if we look at historical years (2017 to now), Northrop Grumman’s operating margin has been better.
  • Northrop Grumman’s free cash flow margin of 5.9% is much better than 1.3% for Boeing.
  • Our Boeing Operating Income Comparison and Northrop Grumman Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Boeing’s 52% debt as a percentage of equity is much higher than 14% for Northrop Grumman, while its 10% cash as a percentage of assets is higher than 4% for the latter, implying that Northrop Grumman has a better debt position, but Boeing has more cash cushion.

3. The Net of It All

  • We see that Northrop Grumman has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Boeing has more cash cushion and is trading at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Boeing is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for Boeing and Northrop Grumman over the next three years and points to an expected return of 39% for Boeing over this period vs. a 10% expected return for Northrop Grumman, implying that investors are better off buying BA over NOC, based on Trefis Machine Learning analysis –Boeing vs. Northrop Grumman – which also provides more details on how we arrive at these numbers.

While BA stock may outperform NOC, it is helpful to see how Boeing’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised by how counter-intuitive the stock valuation is for Marine Products vs. Amerco.

Given the higher inflation and the Fed raising interest rates, Boeing has seen an 8% fall this year. Can it drop more? See how low Boeing stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
BA Return 3% -8% 19%
NOC Return -1% 37% 128%
S&P 500 Return -6% -19% 72%
Trefis Multi-Strategy Portfolio -5% -22% 215%

[1] Month-to-date and year-to-date as of 12/19/2022
[2] Cumulative total returns since the end of 2016

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Notes:
  1. Air India jumbo order includes 190 Boeing MAX, 30 787s -sources, Tim Hepher and Aditi Shah, Reuters, Dec 16, 2022 []