Stocks continue to climb, and the industrial sector has been no exception over the last few months. Shares of high-quality companies The Boeing Company (NYSE:BA) and General Electric Company (NYSE:GE) sit at or near all-time highs. As the economy continues to recover from the damaging effects of the recent recession, more people are getting on planes as business and personal activity picks up again. In that vein, taking a look into the companies that make air travel possible is an intriguing idea. Even though it seems that value is hard to find in today’s market, it’s worth trying to dig into these industrials to see what, if any, attractive valuations may exist.
What, Boeing worry?
Earlier this year, concerns grew regarding the safety of Boeing’s Dreamliner aircraft after a series of mishaps for the company’s new jet. The safety of the jet was called into question after several reported problems, including when an electrical fire broke out in an empty Japan Airlines 787 Dreamliner in January.
After the Dreamliner’s problems surfaced, The Boeing Company (NYSE:BA)’s stock price experienced only a slight blip in what has otherwise been an impressive run over the past few years. Shares have made up losses in the aftermath of the Dreamliner issues, and then some. After declining from $78 per share to $74 per share in January, shares have stampeded higher to the current level of $84 per share.
The market has essentially shrugged off any potential concerns regarding the safety of the Dreamliner, as have the airlines that purchase from Boeing. In early 2012, Indonesia’s Lion Air placed an order for 230 aircraft, a deal worth $22 billion. Other deals include the recently announced tentative agreement in place with Ireland’s Ryanair for $18 billion worth of planes.
The Boeing Company (NYSE:BA) generated more than $81 billion in sales last year, a 19% increase year over year. Operating income rose 8% from the previous year. Boeing is clearly a strong cash flow generator, and the company rewards its shareholders accordingly.
The other masters of the skies
Fellow diversified industrial General Electric Company (NYSE:GE) also has a large aviation business. GE is almost four times as large as The Boeing Company (NYSE:BA) by market capitalization, but isn’t operating nearly as well as its smaller peer. Total revenue was essentially flat in 2012 versus the prior year, and diluted earnings per share increased only 4.8%.
While General Electric Company (NYSE:GE) has done an admirable job digging itself out of the hole caused by the Great Recession—as evidenced by its share price tripling from its March 2009 low—the company’s revenue remains well below the levels seen in 2008 or 2009.
United Technologies Corporation (NYSE:UTX)’s Pratt & Whitney subsidiary makes aircraft engines for commercial, military, business jet, and general aviation markets, as well as provides fleet management services for commercial engines, and represents the company’s largest segment by unit sales. Furthermore, United Technologies operates its UTC Aerospace Systems segment, which supplies electric power generation, management and distribution systems, as well as flight control systems to the aerospace industry.
United Technologies Corporation (NYSE:UTX) performed well last year, but didn’t shoot the lights out by any means. Sales increased 4% year over year, and earnings per share were essentially flat from the prior year. Better news came from the company’s outlook for this year. The company announced 2013 earnings expectations of $5.85 To $6.15 per share for continuing operations, up 10 to 16 percent, on sales growth of 10 to 12 percent.
A cause for concern
United Technologies Corporation (NYSE:UTX)’s balance sheet has $21 billion in long-term debt, which shouldn’t be unexpected for an industrial company with a lot of long-term assets. The company’s long-term debt to equity ratio of 83% is concerning, and is something that you should keep an eye on. By contrast, The Boeing Company (NYSE:BA) is conservatively capitalized, with more than $10 billion in cash and equivalents on the balance sheet, compared with only $9 billion in long-term debt.
General Electric Company (NYSE:GE), meanwhile, has a balance sheet that should give all investors pause. GE has more than $77 billion in cash and equivalents on the books, which is surely a huge sum, but that figure decreased by $7 billion over the past year. Furthermore, General Electric has a whopping $236 billion in long-term debt. The company only has $128 billion in shareholder equity. General Electric is a profitable business, but this huge level of debt should have investors concerned.
GE isn’t expensive, at a price-to-earnings ratio of 18, but because of its huge level of debt, the company is highly leveraged and extremely vulnerable to economic downturns (see 2008-2009). In the future, investors who favor a clean balance sheet will do themselves a favor to monitor GE’s capital structure very closely. Interest rates currently sit at historic lows, but that won’t last forever. At some point, rates will rise, making refinancing a daunting task going forward.
As a result, while General Electric Company (NYSE:GE) is an American business icon with a long operating history and a diversified portfolio of businesses, I’m extremely concerned by the amount of debt the company carries. United Technologies Corporation (NYSE:UTX) and The Boeing Company (NYSE:BA) are in better financial condition, and both trade for more attractive price-to-earnings ratios of 16, with dividend yields north of 2%. These two should be given preference if you’re an investor looking to diversify into the aerospace industry.
The article Which of These Aerospace Stocks Will Fly Highest? originally appeared on Fool.com and is written by Robert Ciura.
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