industrials boeing co. (nyse: ba) recommendation: hold · boeing $91,310 $157 22.2 7.33% 10.81$...

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Krause Fund Research Fall 2017

Industrials Recommendation: HOLD Analysts

Ryan Brennan [email protected]

Sam Goldsberry [email protected]

Nick Magnini [email protected]

Company Overview Boeing is the leading global manufacturer in the Aerospace & Defense industry. The company can be broken down into the following three segments: Commercial Airplanes, Defense, Space & Security (BDS) and Boeing Capital. The Commercial Airplanes segment is the main source of income, accounting for 69% of 2016 revenues, followed by 31% coming from their BDS segment. In 2016, 59% of Boeing’s revenues came from non-U.S. customers. Boeing currently employs 174,225 people, operates in over 65 countries, and reaches customers in approximately 150 countries17. Boeing’s customers include corporations, global airlines and foreign and domestic governments. Boeing is up 60% YTD in 2017 due to favorable improvements in the global economy. Stock Performance Highlights 52 week High $267.21 52 week Low $138.80 Beta Value 1.08 Average Daily Volume 2.93 m Share Highlights Market Capitalization $157.64 b Shares Outstanding 595 b EPS (2016) $7.24 Forward P/E Ratio 23.12 Dividend Yield 2.05% Dividend Payout Ratio 51.07% Company Performance Highlights ROA 5.31% Gross Margin 14.57% Sales $94.57 b Financial Ratios Current Ratio 1.25 Debt Ratio 0.11

Boeing Co. (NYSE: BA)

November 8, 2017

Current Price $260.04 Target Price $268-275

BA Fueled by a Strong Economy

Boeing’s health mimics the success of the overall economy. As a company in the Industrials sector, the recent economic growth in the United States and across the globe has proven to be a positive for the Aerospace & Defense industry. We believe the positive outlook for the global economy serves well for Boeing. Air traffic is projected to grow at an annual rate of 4.8%, which will ensure demand for commercial aircraft in the years to come17. Given that the Commercial Airplanes segment generates the most revenue, Boeing is properly positioned for growth. We forecast continued cost cutting efforts to effectively increase gross margins by 258 bps in 2017. The market is shifting preference to smaller commercial aircraft. As a result, Boeing is increasing production of its 737 MAX to 52/month in 2018. This aircraft has an 8% lower operating cost when compared to its main competitor, the Airbus A32017.

As of quarter-end, Boeing’s backlog stands at more than 5,650 airplanes that provide a nearly $500 billion value and consistent revenue streams for the years to come6. One Year Stock Performance

(Source: NASDAQ19)

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Real GDP Real GDP measures the production of all goods and services in the United States. The Industrials sector grows based on increasing production. Specifically, there is a strong correlation between Real GDP and production in the Aerospace industry. Production within the industry increases when production of the overall economy increases.

U.S. Aerospace Production & Real GDP

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2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2

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Sources: BEA, Board of Governors

Indust r ial Product ion: Durable Goods: Aerospace product and parts

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(Source: U.S. Bureau of Economic Analysis11) The chart illustrates the production levels of products and parts used in the Aerospace industry compared to Real GDP for the last three years. Production has increased over the last several quarters, and we believe this trend will continue into 2018.

U.S. Real GDP (%)

(Source: U.S. Bureau of Economic Analysis11) Currently, GDP is growing at an annualized rate of 3.0%. Based on the graph, this measurement is considered modest when compared to the last five years. Moving forward, we predict a consistent annualized Real GDP of roughly 3.0%. In addition to U.S. Real GDP, the health of the global economy is crucial to Boeing’s success given their abundance of international customers. According to the International Monetary Fund7, countries classified as “Emerging Markets and Developing Economies” are growing at an annualized rate of 4.6%. This forecasts a strong global economy that provides a solid foundation for the Industrials sector to grow production levels and future success for Boeing.

Consumer Confidence Consumer confidence is a measure of the public’s mood and optimism regarding the U.S. economy. Production in the Industrials sector is driven by consumer spending, and this survey is an indicator of future spending.

U.S. Consumer Confidence

(Source: Organization for Economic Co-operation and Development10) Current confidence is at one of the highest levels in the past five years. This implies that the public is demonstrating a very optimistic view of the economy. The Industrials sector generates revenues by selling products and services to consumers. When consumers are unhappy or believe the economy is in poor condition, they are more likely to cut back on spending. The contrary is also true. An optimistic mindset will lead to a greater willingness to spend a portion of income on goods and services. Going forward, this measurement serves as a precursor to strong consumer spending that will keep demand for products high. Treasury Yields For a company in the Industrials sector, the yield on 30-year Treasury bonds is a baseline for the company’s cost of debt. This is effectively the cost that the company will assume in order to take on additional debt to finance projects and operations.

U.S. 30-Year Treasury Yield

(Source: Board of Governors of the Federal Reserve System9) The United States is currently in a low-rate environment. The 30-year Treasury yield is roughly 2.9%, with a potential increase towards the end of year. The Federal Reserve has agreed to keep current interest rates constant, but are indicating a possible uptick in December. The low rates enable companies to borrow money at minimal cost when issuing corporate bonds. This allows them to maximize production and record healthy profit margins. Even with a

Economic Outlook

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potential rate hike at the end of the year, the cost of borrowing money will still be low when compared to the last five years and will not have a negative impact on companies in the Industrials sector. Total Capacity Utilization (TCU) Total Capacity Utilization (TCU) is the percentage of resources being used by a firm at a given period of time. This number is comprised of various manufacturing and mining companies. It is computed by taking the output of a firm and dividing it by the capacity of the firm. This is an important measurement for the Industrials sector for a variety of reasons. First, it tells us how much more a firm can produce without incurring additional machinery or facility expansion costs. Additionally, TCU is an indicator of consumer demand. When firms have a low capacity utilization, this generally means they were forced to shut down at certain times due to lack of demand for their product. This can be especially harmful to industrial companies with high fixed costs.

Total Capacity Utilization

(Source: Board of Governors of the Federal Reserve System8) As of September 2017, Total Capacity Utilization was 76.0%. This number is up by approximately 50 bps from December 2016, indicating a rebound from a very slight decline in 2015. The chart illustrates the level of TCU before and after the economic recession of 2008. Prior to the downfall, TCU was measured at approximately 81.0%. We predict the measurement to hover between 76.0-78% for the foreseeable future, indicating no risk of an overheating economy and a healthy rate of production for firms in the Industrials sector. Fuel (Oil) Prices The price of oil is most commonly measured in terms of dollars per barrel of West Texas Intermediate (WTI) Crude Oil. In the recent past, the price of crude oil has fallen dramatically.

WTI Crude Oil ($/barrel)

(Source: U.S. Energy Information Administration12) The price of WTI crude oil is trading at roughly $56/barrel, less than half the price when compared to 2013. Firms in the Industrial sector prefer lower oil prices for two main reasons: Manufacturing and consumer wealth. Industrial companies generate revenue by mass production, which is often powered by oil. When oil prices are low, production costs are reduced and profit margins will increase. We predict oil to hover between $45-$60/barrel for the next several years, allowing production costs to remain relatively low. In addition to manufacturing costs, oil prices are representative of the price of gas to a consumer. Low oil prices mean that consumers are paying less per gallon of gas for their vehicles. As a result, consumers have more disposable income to spend on goods and services. Given that the industrial firms are producing such goods and services, continued low oil prices are a key positive. Capital Markets Outlook Based on current conditions, the U.S. and global economy appears to be very stable. Due to the strong economy, the capital markets should present opportunities to see impressive growth and returns. The Industrials sector typically shows a significant correlation with the market as a whole, so the recent/projected strong economic indicators will lead to increased production levels and positive returns. Additionally, the Industrials sector benefits directly from government defense spending. On November 8th, the U.S. Department of Defense increased their 2018 spending plan to $700 billion, up from the original $603 billion18. They claim the increase will be primarily used to grow the fleet of fighter jets and ships. Firms in the Industrials sector will be producers of this fleet, and the capital markets should respond positively to this growth.

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Description The Aerospace & Defense industry is a mature industry that tends to mimic the patterns of the overall economy. When the economy sees growth, this industry does as well. On the flip side, a downturn in the market results in poor performance due to the cyclical nature. The industry can be narrowed into two sub-groups: Commercial airlines and defense. On the commercial side, the two main players are Boeing and Airbus with each controlling roughly 50% of the market. A majority of revenue streams come from fulfilling orders of commercial airplanes.

Commercial Aircraft Companies Comparison

Commercial Aircraft

Sales (TTM) Market Cap. (Billions) P/E Ratio Net Margin (TTM) EPS (TTM) Backlog (Units)

Boeing $91,310 $157 22.2 7.33% 10.81$ 5650

Airbus $79,005 $67 75.4 1.55% 1.58$ 6691 (Source: ThomsonOne3) Boeing is a larger company than Airbus when compared by market capitalization. This can be attributed to Boeing’s additional business segments in Defense, Space and Security. When comparing net margin, Boeing is the clear leader. Airbus has put significant effort into gaining market share at expense to their profitability. As a result, Airbus has a backlog of 6,691 planes, ahead of Boeing’s 5,650. This should provide consistent deliveries for both companies for the next 8-10 years. In 2017, Boeing has outperformed Airbus when collecting orders. Boeing has accumulated 621 orders compared to only 343 orders for Airbus jets20. This defies the historically equal market share with Boeing as the clear leader. Additionally, Boeing recently won a deal with an airline based out of Dubai, Emirates. The airline has agreed to purchase 40 787 jets, valued at $12.5 billion20. This gives Boeing a significant advantage in a rapidly growing market.

Defense Companies Comparison Defense

Sales (TTM) Market Cap. (Billions) P/E Ratio Net Margin (TTM) EPS

Lockheed Martin $49,663 $87 23.9 7.31% 12.70$

Boeing $91,310 $157 22.2 7.33% 11.42$

BAE Systems $24,061 $19 17.8 5.72% 0.33$

Northrop Grumman $25,566 $47 20.4 9.24% 13.09$ (Source: ThomsonOne3) On the defense side, there is less of a duopoly with Lockheed Martin being the leader followed by Boeing, BAE Systems and Northrop Grumman. Once again, a majority of Boeing’s sales are within the commercial aircraft segment resulting in higher revenues when compared to other defense companies. Despite

not being a pure-play defense firm, Boeing posts strong margins and appears to be fairly valued compared to peers. Defense spending is less correlated with the economy, but a majority of firms in the industry generate revenues primarily from the commercial sector. Regardless, we predict that the increased military spending proposed by President Trump will bode well for companies that operate with defense contracts. Industry Trends So far in 2017, we’ve seen significant returns from companies in the A&D industry.

A&D ETF Compared to S&P 500

(Source: StockCharts3) The chart illustrates the performance of an aerospace & defense ETF compared to the S&P 500 over the last 12 months. Prior to the 2016 Trump victory, the ETF clearly mimics the market as a whole. Optimism regarding President Trump’s promise to increase real GDP and government spending in the defense segment has led to the ETF outperforming the market. We believe the recent upticks in real GDP to 3.0% validate the outperformance and serve well for companies in the industry going forward. In addition to growth within the United States, strong demand across the globe are fueling aerospace & defense companies. Specifically, emerging markets and economies present tremendous growth opportunities in areas such as Asia, Middle Eastern Europe and Latin America. Annual passenger growth over the last five years has averaged 10% and 20% for China and India, respectively. Compared to the global rate of 6.2%, this reflects the growth opportunities in these areas6.

Industry Analysis

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World Traffic Growth

(Source: Boeing Annual Report17) The chart illustrates the variation in projected world traffic growth of different global markets. Boeing projects that annual growth will be 4.8% across the globe with areas in Asia growing as rapidly as 6.1%. This results in an estimated 41,030 necessary deliveries over the next 20 years with a market value of over $6 trillion17. In addition to traffic growth, consumer spending on travel and tourism is increasing. In 2016, international tourist arrivals, a measure of air travel spending by tourists, outpaced GDP with a rate of 3.9%. Over the next 10 years this number is projected to grow at an annual rate of 4.0%, providing a solid consumer base for companies with significant revenues from consumer aircraft6. Markets & Competition Porter’s 5-Forces Threat of New Entrants: Low Boeing generates a majority of revenues from the sale of commercial aircrafts. This market is primarily a duopoly with the main competitor being Airbus. Given the size of the industry, the threat of new entrants is very low. Boeing has a market capitalization of $153 billion and manages to produce their primary jet, the 737, at a rate of 47/month. Demand for the 737 has grown in recent years, and Boeing intends on increasing production to a rate 52/month in 2018. An emerging company would severely lack in the ability to match production output and fulfill contracts. In contrast, Comac is a Chinese State-owned aircraft manufacturer in Shanghai, China that could potentially be a threat in the future. The recent and projected traffic growth in the Asia-Pacific area serves as a tremendous investment opportunity, so emerging manufacturers to be located in Asia is expected. Fortunately, Comac significantly lacks in size when compared to Boeing and Airbus. As a result, they provide a very low threat.

Threat of Suppliers: Medium The necessary supplies for a Boeing jet can be divided into three broad categories: Aerostructures, jet engines and components and parts. The main suppliers of aerostructures include Spirit AeroSystems, Precision Castparts Corp. and Triumph Group. In addition, Boeing obtains jet engines from GE, Pratt & Whitney and Rolls-Royce13. Long-term relationships and contracts with these companies minimizes their risk to increase the prices of supplies. Recently, the bargaining power of suppliers of the required components and parts of a jet have increased. UTC Aerospace Systems, Rockwell Collins and Honeywell are Boeing’s main three suppliers, and the threat of higher prices has historically been minimal. But in September, UTC proposed an acquisition of Rockwell Collins with a market value of $30 billion13. While the deal has not been approved, the combination of two main suppliers could increase their bargaining power. Overall, Boeing obtains supplies from over 100 different companies. Given the size of the industry and long-term contracts, the threat of higher supply prices is generally minimal. Regardless, acquisitions that put significant market control into the hands of one company could pose potential threats in the future. Threat of Buyers: Medium The buyers for companies in the aerospace industry include airlines such as Delta, United, etc. These airlines purchase planes through long-term contracts, making it difficult to abruptly switch to a new supplier. Additionally, Boeing and Airbus are the two main providers of commercial aircraft. The product mix is beginning to switch in favor of smaller, less expensive aircraft. Both Boeing and Airbus have planes that fit these demands, so this shift should not affect the power of buyers. With virtually all of the market share between two companies, the bargaining power of commercial airlines is relatively minimal. However, the similarities between the aircraft provided by Boeing and Airbus can often lead to price wars. Airlines will often choose their supplier based on the lower price, meaning that Boeing must adhere to buyer demands. On the defense side, governments are the primary buyer. Orders are fulfilled through long-term contracts, so governments are similar to commercial airlines in the way that switching suppliers is relatively difficult. Threat of Substitutes: Low Currently, there is no substitute for products in the aerospace & defense industry. The primary product is a commercial jet, and a substitute would need to provide an alternative to air travel. This alternative is very unlikely in the foreseeable future, essentially eliminating this threat altogether.

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Competitive Rivalry: High The commercial aircraft business is a duopoly that is primarily dominated by Airbus and Boeing, where a majority of revenues are derived through the orders and deliveries to large airlines. When an airline is looking to order more planes, the decision generally comes down to these two companies. Both Boeing and Airbus have a variety of planes of different sizes, speeds, etc. This means that the final decision often comes down to the price of the order and whether or not there is a clear advantage to choose Boeing or Airbus. Given the duopoly, the industry is extremely competitive. Boeing and Airbus must constantly innovate and find new ways to attract buyers. Boeing has pulled ahead of Airbus when comparing 2017 orders and has won recent deals with global airlines in emerging markets. Going forward, we believe the market share will remain relatively equal and both companies will see modest growth accompany the increased air traffic. Growth Catalysts World GDP The health of the U.S. and global economy appears to be very strong. As previously discussed, current economic indicators lead us to believe that the foreseeable economy will provide a solid platform for companies within the Aerospace & Defense industry. Specifically, these companies generate revenues through increasing production, which is directly correlated with Real GDP. We forecast Real GDP to grow at an annual rate of 3.0%, with emerging markets growing as fast as 4.6%. Going forward, Boeing should mimic the health of the economy and show strong performance. Oil Prices Because companies within this sector generate revenues through production, the cost that it takes to produce is crucial. Oil prices are forecasted to remain around $50/barrel into the future. This keeps manufacturing costs low for companies like Boeing and enables them to increase profitability. Over time, we believe that revenues will grow at a faster pace than the cost of products, leading to positive improvements in margins. Aircraft Replacement The average economic life of a commercial airplane is roughly 20 years. This number has risen over the past several years as a majority of planes in the market are getting older, with the average fleet age between 12-15 years. This will lead to increased demand over the next several years as airlines are looking to replace their supply of older fleets. Boeing has projected that roughly 43% of its growth over the next 20 years will be due to replacement

requests. Boeing has the ability to capitalize on this opportunity and potentially take market share from Airbus.

Executive Summary Boeing is the leading supplier of commercial airplanes, weapons systems, and defense aircraft in the United States. As a company in the Industrials sector, the recent economic growth in the United States and across the globe has proven to be positive for the Aerospace & Defense industry. Air traffic is projected to grow at an annual rate of 4.8%, which will ensure demand for commercial aircraft in the years to come. We believe that the favorable forecast for the world economy and more specifically the Aerospace industry will serve well for Boeing in the foreseeable future. Company Overview Boeing is the leading global manufacturer in the Aerospace & Defense industry, and the company can be broken down into the following three segments: Commercial Airplanes, Defense, Space & Security (BDS) and Boeing Capital. The Commercial Airplanes segment is the main source of income, accounting for 69% of 2016 revenues, followed by 31% coming from their BDS segment. In 2016, 59% of Boeing’s revenues came from non-U.S. customers. Boeing currently employs 174,225 people, operates in over 65 countries, and reaches customers in approximately 150 countries. Boeing’s customers include corporations, global airlines, and foreign and domestic governments. Boeing is up more than 60% YTD in 2017 due to favorable improvements in the global economy. Financial Summary Boeing has performed extremely well over the past year. The stock price is up more than 60% YTD in 2017 due to economic improvements in the United States and across the globe. While Q2 2017 revenues were $22.7 billion, down from $24.8 billion in Q2 2016, core earnings came in at $2.55/share compared to a loss of $0.44 a year ago4. These favorable results were primarily due to lower reach-forward losses. Operating cash flow for the first half of 2017 was $7.0 billion, compared to $4.5 billion from 2016. Boeing indicates that the strong results for cash flow is mainly a result of the timing of receipts and expenditures17. As of quarter-end, Boeing’s backlog stands at more than 5,650 airplanes that provide a nearly $500 billion value. With a forecasted economy that favors the Aerospace & Defense industry, the company predicts 2017 EPS to come in at $9.90-$10.10/share. This estimate is up $0.60 from the previous forecast.

Company Analysis

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Products & Markets Of the three operating segments, Commercial Airplanes is the main source of income, accounting for 69% of 2016 revenues. The remaining 31% consisted of revenues due to the BDS/ Boeing Capital segment.

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Q2 2017 REVENUE BREAKDOWN

Commercial Airplanes BDS Boeing Capital Other

(Source: Boeing Q2 Report22) As of November 7, 2017, gross orders for the year stood at 621, with 450 of those being the 737 jet. Boeing is ramping up their production of these jets to 52/month from 47/month to accommodate for increasing demand. This increase is due to the operating cost of the 737, which is 8% lower than its main competitors. By 2019, Boeing plans on increasing production efficiency to a rate of 57/month. From the BDS segment, the range of products and revenue distribution are broader. In 2016, Boeing was the 2nd largest global defense contractor behind Lockheed Martin and was responsible for manufacturing helicopters, fighter jets and additional military services/weapons. We believe the expected increase in U.S. defense spending for 2018 will result in higher demand for products from the BDS segment. Boeing has recently cut manufacturing costs in the Commercial Airplanes segment, and the ability to improve margins in the BDS segment will be crucial when competing with Lockheed Martin for government contracts.

Geographic Revenue Breakdown

(Source: ThomsonOne3)

Boeing’s market spans the entire world, with customers including major airlines, corporations and governments in approximately 150 countries. As of now, the aircraft backlog stands at over 5,650 with more than 70% of planes from global customers. While Boeing is the top exporter in the U.S., it is worldwide economic growth that is the key driver for the company. Specifically, air traffic in the Asia-Pacific area is predicted to grow at an annual rate of 5.7% as markets continue to develop17. Boeing has the resources to take advantage of the development and fulfill demands for air travel. Production & Distribution Boeing is highly dependent upon the availability of essential materials required for aircraft. These materials include aluminum, titanium and composites. Additionally, the price of oil has a huge impact on profitability during production. As the price of crude oil has fallen more than 50% in the past three years, aerospace companies have benefitted and improved their margins. The forecasted price of oil is expected to remain relatively stagnant, a key positive for Boeing. Due to the complexity of commercial and military aircraft, Boeing outsources a significant amount of its production duties to suppliers. The jet engine business is dominated by GE, Pratt & Whitney and Rolls-Royce. Because each provider is looking to sell to either Boeing or Airbus, price wars have allowed aircraft manufacturers to negotiate for lower priced contracts. Recently, United Technologies proposed a $30 billion acquisition of Rockwell Collins. This could be a potential threat to Boeing as more power is shifted into a single entity. The deal would result in a powerhouse supplier of landing gear, engines and avionics systems. If supply costs increase, profit margins on the orders and deliveries would decrease. In response to the merger, Boeing has indicated a potential shift to manufacture more supplies in-house and possibly renegotiate contracts. We believe that Boeing has the size and resources to mitigate this potential risk and continue to operate under favorable margins. Competition Because Boeing operates in multiple segments, it is appropriate to distinguish the competition between the Commercial Airplanes and BDS segment.

Boeing & Airbus Annual Orders (Q2 2017)

(Source: Boeing/Airbus Orders & Deliveries16) The Commercial Airplanes segment is a duopoly that consists of Boeing and Airbus, with each company controlling roughly 50% of the market. Boeing has a market capitalization of $157 billion, nearly 3x that of Airbus even though Airbus had 731

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orders compared to Boeing’s 668 in 2016. Airbus has a significantly smaller segment for military and defense, proving that the company is a true threat on the commercial side for Boeing. This equal share of control makes the segment highly competitive and Boeing’s ability to keep margins high and offer low costs is crucial. Fortunately, the 737 has an 8% lower operating cost when compared to the A320 from Airbus and Boeing recently won a deal with Malaysia Airlines valued at $2.75 billion. This will give Boeing an advantage as air traffic in Malaysia continues to grow. In 2016, passenger growth in this area was 7% and is predicted to grow 11% in 20176. The market is clearly developing at a fast rate, and Boeing’s ability to close the deal and establish the relationship provides an opportunity for significant growth. There is less of a duopoly of competition in the defense segment, with Lockheed Martin being the leader, followed by Boeing, BAE Systems and Northrop Grumman. The BDS segment offers a huge range of products from fighter jets to weapons and product support. This gives Boeing an advantage as their products are diversified and the systems are all integrated, providing top-notch value to their customers. Going forward, Boeing’s ability to continue cost-reduction efforts are crucial in order to compete for major contracts. Catalysts for Growth The future success of Boeing is primarily dependent upon the future of the global economy. Being a company in the Industrials sector, a growing economy leads to air traffic growth. Boeing forecasts global GDP to grow at an average annual rate of 2.8% for the next 20 years and that the air travel market will be 2.5 times larger in 2036 than it is today, resulting in a $6.1 trillion market value17.

Asia-Pacific Market Share

(Source: Boeing Current Market Outlook17) Focusing efforts into the markets of developing countries is crucial, specifically the Asia-Pacific area where air traffic is expected to grow at a CAGR of 5.7%. By 2036, the share of global jet fleet in the area will expand to 37% making this an excellent opportunity for Boeing. The recent deal with Malaysian Airlines will give Boeing an advantage going forward as the relationship with a rapidly-growing market is established.

Additionally, the business models of major airlines has begun to switch from network carriers to low-cost carriers. Whereas a network carrier offers a broader range of services and perks, low-cost carriers focus on cutting unnecessary expenses to drive down the cost of air travel. Over the past two decades, such carriers have been able to reduce unit cost by 20-40% and stimulate air traffic growth5. One major cost cutting effort has been to operate with a single type of airplane, which is most often a single-aisle jet. We believe Boeing has the resources to streamline production and focus efforts towards their 737 jet to meet future demands as more airlines adopt this business model. On the military & defense side, Boeing is subject to future decisions of government spending. The U.S. government has a substantial impact on Boeing’s operations, as the government accounted for 23% of 2016 revenues and regulates their businesses heavily5. As tensions with North Korea continue to rise, we believe that military funding will increase and Boeing can capitalize as a result. Additionally, the T-X Program through the United States Air Force is looking to purchase an additional 350 trainer jets in the beginning of 2018. The deal is worth roughly $16 billion and has been narrowed down to either Lockheed Martin or Boeing5. If Boeing is able to offer competitive prices and win the deal, the company will see significant growth in their BDS segment.

Valuation Summary We arrive at a HOLD rating for Boeing after utilizing Discounted Cash Flow (DCF), Economic Profit (EP), Dividend Discount (DDM) and Relative Valuation Models. Our target price of $268-275 is an equal-weighted approach due to the consistency of cash flows and dividends for a well-established company such as Boeing. Key Assumptions Revenue Decomposition Commercial Airplanes: Our revenue forecasts are derived based on historical prices of individual planes. Revenues are driven by the number of aircraft deliveries each year, and by reviewing the historical prices we were able to determine the revenue/plane delivery for each type of aircraft. Going forward, we assumed this metric will rise along with inflation at roughly 2.0%. Additionally, we assume a product shift towards smaller aircraft such as the 737. Finally, we believe shift to smaller planes will slightly increase Boeing’s annual delivery capacity by approximately 10 planes/year. Boeing Military Aircraft: Revenues for this segment have been relatively stagnant the past several years. Going forward, we

Valuation Analysis

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believe increased government spending and rising tensions with North Korea will result in a CAGR of 2.00% through 2021. Network & Space Systems: Similar to Boing Military Aircraft, revenues have been consistent over the past few years. That being said, Boeing recently acquired a company that specializes in unmanned aerial vehicles and systems, Aurora Flight Sciences. We believe that the acquisition, combined with increased global focus in autonomous machines, will moderately increase revenues in this segment annually by 2.0%. Cost of Sales Cost of Products: Our assumption is based on a ten-year average as a percentage of sales of products. This results in a forward prediction of 80.57% of sales. Cost of products was roughly 83% of sales of products in 2016, but Boeing has increased focus on reducing manufacturing costs. Our model reflects this focus on cost-cutting efforts. Cost of Services: Similar to our cost of products assumption, we forecast cost of services based on a ten-year average as a percentage of sales of services. This average results in a forward value of 80.01% of revenues from services. Research and Development Costs The past five years have indicated a strong correlation between revenues and R&D expenses. Going forward, we believe that this trend will continue at an average percentage of sales from the last five years. Our model reflects a demand shift in favor of the 737, which is Boeing’s most well established aircraft. This results in minimal risk of significant increases to R&D costs. Shares Outstanding Much of Boeing’s significant increase in share price YTD is due to an aggressive share-buyback program. The company released their intent to repurchase $14 billion of common stock, and has already repurchased $6 billion in 2017. We believe the company will continue to repurchase at a rate of $1-3 billion/year from 2018-2021. Long-Term Debt We forecast the balance of long-term debt (LTD) based on a percentage of non-cash assets. The previous five-year average of this value is 11.00%, which we keep consistent through 2021. Boeing is a well-established company with minimal amounts of debt, and we believe their capital structure will remain relatively constant moving forward. Weighted Average Cost of Capital (WACC) Cost of Equity: We calculated the cost of equity using the Capital Asset Pricing Model (CAPM). To use this, we needed the risk-free rate, equity risk premium and Boeing’s raw beta. The risk-free rate of 2.79% is the yield of the 30-year U.S.

Treasury bond15. The equity risk premium was derived from Aswath Damadoran’s14 implied value as of 11/1/2017. Finally, the raw beta was calculated from Bloomberg using an average of Boeing’s weekly betas from the past 3-5 years. Using CAPM, this resulted in a cost of equity of 7.82%. Cost of Debt: The cost of debt was derived from Boeing’s YTM on their 30-year corporate bond. This resulted in a pre-tax cost of debt of 3.56%. After applying the tax rate of 25%, the after-tax cost of debt was calculated to be 2.67%. WACC: The market value of debt was estimated by adding up short-term debt, long-term debt and the present value of operating leases. The market value of equity was estimated by multiplying the current share price by the number of shares outstanding. This results in market value weights of debt and equity to be 6.61% and 93.39%, respectively. The final calculation resulted in a WACC of 7.48%. Valuation Models Discounted Cash Flow (DCF) & Economic Profit (EP) The DCF model is constructed by forecasting the free cash flows of Boeing and discounting them based on the WACC. The annual free cash flows are calculated by subtracting the change in invested capital from the net operating profit less adjusted taxes (NOPLAT). The EP profit model is constructed by investigating the annual difference between Boeing’s return on invested capital (ROIC) and their WACC. This difference is multiplied by the beginning year invested capital, and the result is the economic profit that the firm generated for the given year. For both models, we assumed that Boeing will reach their continuing-value growth rate by 2021. At this point, we forecast the NOPLAT to grow at an annual rate of 2.75% into perpetuity. We derived this assumption based on a conservative estimate of our implied annual growth through 2021. For the next five years, this implied growth is roughly 3.00%. Both models resulted in an intrinsic stock price of $274.41. We believe that Boeing’s operations are fairly mature, and their cash flows provide an accurate metric for valuing the company. As a result, the DCF/EP profit should be a solid method for valuation. Dividend Discount Model (DDM) Boeing is a well-established company that has increased their annual dividend for ten straight years. For this model, we assumed a forward dividend payout ratio of 51.07%. This is an average of their payout ratios from the last ten years. The model yields an intrinsic stock price of $275.62. This price is very close to the results of the DCF and EP models. Because Boeing has placed significant emphasis on their dividends, we believe this serves as another reasonable method for valuation of the company.

10

Relative P/E Valuation Our relative valuation model is comprised of six comparable companies to Boeing. The model computes an intrinsic stock price based on 2017 and 2018 forward P/E ratios. This results in stock prices of $268.63 and $243.09, respectively. We don’t believe that this model provides the best estimate for intrinsic stock price. Boeing has more product diversification than the other comparable companies, as Boeing is a significant market player in both the commercial and defense industries. As a result, the companies are not completely similar and should have variance in their P/E ratios. Sensitivity Analysis CV Growth of NOPLAT vs. WACC This analysis illustrates the volatility of the DCF model based on our long-term cash flow assumption and the estimated cost of capital. We believe that Boeing’s cash flows will grow at roughly the rate of real GDP. The table represents a conservative range of values that align with this assumption. Additionally, the WACC has a significant effect on our valuation. For every 0.25% change in NOPLAT growth and WACC, the stock price varies by $15-20. CV ROIC vs. Capital Expenditures as % of Sales The analysis shows that a changing CV ROIC also has a significant impact on the stock price. This value is used to compute the value of cash flows from 2021 into perpetuity, so small alterations can result in big changes to stock price. Our forecast has ROIC varying from 36.00% to 39.00% from 2017-2021. This leads to potential changes in stock price of roughly $10. In contrast, the range of values for capital expenditures may appear small, but Boeing has posted very consistent values for the past several years. Going forward, we see no reason for this metric to suddenly deviate. As a result, the stock price does not vary significantly. Risk-Free Rate vs. Equity Risk Premium The risk-free rate and the equity risk premium are used to calculate the discount rate (WACC) used in the DCF/EP models. This analysis demonstrates the dependency of the model to future economic conditions. Rising interest rates could result in a $10-15 decrease in stock price. Additionally, the equity risk premium is a metric where experts consistently disagree. The table shows that changes as small as 0.10% in this assumption will have a $5 effect on stock price. Tax Rate vs. Beta This analysis shows how future uncertainty in corporate tax reform and the risk of the equity markets can have significant impacts on the intrinsic stock price. For every 5.00% decrease in the tax rate, the stock price increases by roughly $15. Similarly, the beta represents the risk of Boeing compared to the risk of the market as a whole. Because Boeing is a company in the

Industrials sector that tends to mimic the health of the economy, their beta is fairly close to 1.00. Regardless, a change of 0.1 in our beta calculation would change the stock price by over $20. Cost of Goods Sold (COGS) vs. Research & Development Costs This analysis illustrates the importance of our forward expense assumptions. Boeing has incorporated significant cost-cutting efforts, and the failure to control their manufacturing costs would change the DCF/EP valuation by $30-50. Additionally, we forecast the R&D expense to remain at a 5-year average percentage of sales. If Boeing were to increase research or development focus, the price could fluctuate by $15-20.

11

References

1. Find Companies in Iowa and Other Regions and Countries for NASDAQ, NYSE, and AMEX Listed Companies Using the Company List Tool at NASDAQ.com. NASDAQ.com, NASDAQ, www.nasdaq.com/screening/companies-by-region.aspx?region=North%2BAmerica&country=United%2BStates&state=IA.

2. Stock Screener. Stock Screener Page, Fidelity, and

research2.fidelity.com/screener/stock-screener.

3. Halpern, Steven. “Three ETFs for Aerospace & Defense.” Moneyshow.com, 30 June 2017, www.moneyshow.com/articles/tptp072513-46399/three-etfs-for-aerospace--defense/.

4. STEWART, JAMES B. “As Boeing Goes, So Goes the

Stock Market.” The New York Times, The New York Times, 10 Aug. 2017, www.nytimes.com/2017/08/10/business/boeing-stock-market.html.

5. CFRA. (2017). 2017 Industry Surveys: Aerospace &

Defense New York, NY: Author.

6. Boeing Commercial Airplanes. (2017). 2017-2036

Current Market Outlook. Retrieved from http://www.boeing.com/resources/boeingdotcom/commercial/market/current-market-outlook-2017/assets/downloads/2017-cmo-compressed_090717.pdf

7. “World Economic Outlook.” International Monetary Fund, www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

8. Board of Governors of the Federal Reserve System (US), Capacity Utilization: Total Industry [TCU], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/TCU, November 2, 2017.

9. Board of Governors of the Federal Reserve System (US), 30-Year Treasury Constant Maturity Rate [DGS30], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS30, November 2, 2017.

10. Organization for Economic Co-operation and Development, Consumer Opinion Surveys: Confidence Indicators: Composite Indicators: OECD Indicator for the United States [CSCICP03USM665S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CSCICP03USM665S, November 2, 2017.

11. U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, November 2, 2017.

12. U.S. Energy Information Administration, Crude Oil

Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DCOILWTICO, November 2, 2017.

13. “Key Raw Materials, Parts and Components.” Aeroweb, www.fi-aeroweb.com/firms/Materials/Materials-Boeing.html.

14. Damadoran, A. (n.d.). Damadoran Website. Retrieved November 1, 2017 from http://pages.stern.nyu.edu/~adamodar/

15. U.S. Department of the Treasury. Retrieved November 1, 2017 from https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

16. Airbus and Boeing Average List Prices 2017. Retrieved October 8, 2017 from http://atwonline.com/data-financials/airbus-and-boeing-average-list-prices-2017

17. Boeing Current Market Outlook 2017. Retrieved September 13, 2017 from http://www.boeing.com/resources/boeingdotcom/commercial/market/current-market-outlook-2017/assets/downloads/2017-cmo-6-19.pdf

18. Stone, Mike. “Congress Finalizes $700 Billion Defense Spending Plan.” Reuters, Thomson Reuters, 8 Nov. 2017, www.reuters.com/article/us-usa-budget-defense/congress-finalizes-700-billion-defense-spending-plan-idUSKBN1D82I5.

19. “Boeing Stock Chart.” NASDAQ, EDGAR Online, 8 Nov. 2017, www.nasdaq.com/symbol/ba/stock-chart.

20. Bechai, Dheirin. “Boeing October Order Report.” Seeking Alpha, 8 Nov. 2017, seekingalpha.com/article/4124022-boeing-october-order-report-777-going-strong.

21. Boeing Company Annual Report 2016. Retrieved September 13, 2017 from http://s2.q4cdn.com/661678649/files/doc_financials/annual/2016/2016-Annual-Report.pdf

22. Boeing Company Quarterly Report Q3 2017. Retrieved November 1, 2017 from http://s2.q4cdn.com/661678649/files/doc_financials/quarterly/2017/Q3/q3_17_10q.pdf

23. Thomson ONE.com. (2017) Thomson ONE.com. Thomson Reuters. [Online]. Available at: http://www.thomsonone.com/ (Accessed: 22 September 2017)

Boeing

Key Assumptions of Valuation Model

Ticker Symbol BA

Current Share Price $260.04

Current Shares Outstanding 595

Beg. Year Share Price $155.68

Current Model Date 11/8/2017

FY End (month/day) Dec. 31

Pre‐Tax Cost of Debt 3.56%

Beta 1.08

Risk‐Free Rate 2.79%

Equity Risk Premium 4.66%

CV Growth of NOPLAT 2.75%

CV Growth of EPS 2.50%

Current Dividend Yield 2.05%

Marginal Tax Rate 25.00%

Effective Tax Rate 12.70%

WACC 7.48%

CV ROIC 39.71%

Dividend Payout Ratio 51.07%

R&D % of Sales ‐3.82%

Cap Ex % of Sales ‐2.26%

Forward P/E 23.12

Boeing

Revenue Decomposition

Fiscal Years Ending Dec. 31 2014 2015 2016 2017E 2018E 2019E 2020E CV (2021)

Commercial Airplanes

737

Orders 1154 656 640 625 644 663 683 703

Deliveries 485 495 490 524 535 545 555 562

Beginning Year Backlog 3680 4299 4392 4542 4643 4752 4870 4997

Program Revenue 24324 25669 25761 27952 28898 29865 30853 31669

747

Orders 2 6 18 7 7 6 6 6

Deliveries 19 18 9 9 9 9 10 10


Program Revenue 3568 3495 1772 1820 1882 1945 2009 2062

767

Orders 4 49 26 25 26 26 27 27

Deliveries 6 16 13 11 12 12 12 12


Program Revenue 590 1626 1339 1191 1231 1272 1314 1349

777

Orders 277 58 23 57 59 61 63 65

Deliveries 99 98 99 76 78 79 81 82


Program Revenue 16528 16917 17326 13485 13941 14408 14885 15278

787

Orders 46 99 80 116 118 121 123 126

Deliveries 114 135 137 139 142 145 147 149


Program Revenue 14979 18341 18870 19422 20080 20752 21438 22005

Segment Revenue 59990 66048 65069 63870 66032 68242 70500 72364

% Growth 10.10% ‐1.48% ‐1.84% 3.39% 3.35% 3.31% 2.64%

Boeing Military Aircraft 13410 13424 12515 12528 12778 13034 13294 13560

Network & Space Systems 8003 7751 7046 7116 7259 7404 7552 7703

Global Services & Support 9468 9213 9937 10036 10237 10442 10651 10864

Boeing Capital 416 413 298 350 400 415 415 415

Uncallocated (525) (735) (294) (300) (300) (300) (300) (300)

Total Revenue 90762 96114 94571 93600 96406 99236 102112 104606

Boeing

Income Statement


Sales of products 80,688$ 85,255$ 84,399$ $ 83,304 $ 85,801 $ 88,320 $ 90,880 $ 93,099 Sales of services 10,074 10,859 10,172 10296 10605 10916 11232 11507

Total revenues 90,762 96,114 94,571 93600 96406 99236 102112 104606

Cost of Products (66,645) (71,613) (70,803) (67122) (69134) (71164) (73226) (75014)Cost of services (8,132) (8,578) (8,018) (8238) (8485) (8734) (8987) (9207)Depreciation of PP&E (1,414) (1,357) (1,418) (1631) (1692) (1754) (1816) (1879)Amortization of intangibles (492) (476) (492) (492) (492) (492) (492) (492)Boeing Capital Corporation interest expense (69) (64) (59) (65) (64) (65) (67) (68)

Total costs and expenses (76,752) (82,088) (80,790) (77548) (79867) (82209) (84589) (86660)

Income from operating investments, net 287 274 303 306 315 325 334 342 General and administrative expense (3,767) (3,525) (3,616) (3557) (3663) (3771) (3880) (3975)Research and development expense, net (3,047) (3,331) (4,627) (3571) (3678) (3786) (3896) (3991)Loss on dispositions, net (10) (1) (7) (7) (7) (7) (7) (7)

Earnings from operations 7,473 7,443 5,834 9223 9505 9787 10074 10315Other income/(loss), net (3) (13) 40 32 33 34 35 36Interest and debt expense (333) (275) (306) (318) (310) (317) (324) (331)Earnings before income taxes 7,137 7,155 5,568 8937 9229 9505 9786 10020Income tax expense (1,691) (1,979) (673) (2234) (2307) (2376) (2446) (2505)

Net earnings 5,446$ 5,176$ 4,895$ $ 6,703 $ 6,922 $ 7,129 $ 7,339 $ 7,515

Basic earnings per share 7.47$ 7.52$ 7.70$ 11.25$ 11.79$ 12.17$ 12.56$ 12.88$

Dividends per Share 3.10$ 3.82$ 4.69$ 5.74$ 6.02$ 6.22$ 6.41$ 6.58$

Total Shares Outstanding 706.7 666.6 617.2 596 587 586 584 583

Boeing

Balance Sheet

Fiscal Years Ending Dec. 31 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E CV (2021)

AssetsCash and cash equivalents 6,118$ 7,042$ 3,268$ 9,215$ 5,359$ 10,049$ 10,341$ 9,088$ 11,733$ 11,302$ 8,801$ $ 4,625 $ 5,701 $ 9,344 $ 12,986 $ 16,815 Short-term and other investments 268 2,266 11 2,008 5,158 1,223 3,217 6,170 1,359 750 1,228 1262 1297 1334 1371 1409Accounts receivable, net 5,285 5,740 5,602 5,785 5,422 5,793 5,608 6,546 7,729 8,713 8,832 7922 8160 8400 8643 8854Current portion of customer financing, net 370 328 425 368 285 476 364 344 190 212 428 344 344 344 344 344Inventories, net of advances and progress billings 8,105 9,563 15,612 16,933 24,317 32,240 37,751 42,912 46,756 47,257 43,199 42120 43383 44656 45950 47073

Total current assets 22,983 27,280 25,964 35,275 40,572 49,810 57,309 65,074 67,785 68,234 62,488 56273 58885 64077 69293 74495Customer financing, net 8,520 6,777 5,857 5,466 4,395 4,296 4,056 3,627 3,371 3,358 3,773 3,494 3,598 3,704 3,811 3,904Property, plant and equipment, net 7,675 8,265 8,762 8,784 8,931 9,313 9,660 10,224 11,007 12,076 12,807 13,292 13,778 14,266 14,757 15,242Goodwill 3,047 3,081 3,647 4,319 4,937 4,945 5,035 5,043 5,119 5,126 5,324 5,324 5,324 5,324 5,324 5,324Acquired intangible assets, net 1,698 2,093 2,685 2,877 2,979 3,044 3,111 3,052 2,869 2,657 2,540 2,048 1,556 1,064 572 80Deferred income taxes 2,837 2,341 1,046 966 31 5,892 6,753 2,939 6,576 265 332 399 479 576 692 832Investments 4,085 4,111 1,328 1,030 1,111 1,043 1,180 1,204 1,154 1,284 1,317 1,356 1,396 1,437 1,479 1,515Other assets, net of accumulated amortization 2,735 1,258 1,406 1,224 1,603 1,643 1,792 1,500 1,317 1,408 1,416 1456 1496 1538 1581 1625

Total assets 51,794$ 58,986$ 53,779$ 62,053$ 68,565$ 79,986$ 88,896$ 92,663$ 99,198$ 94,408$ 89,997$ $ 83,641 $ 86,513 $ 91,986 $ 97,510 $ 103,017

Liabilities and equityAccounts payable 5,643$ 5,714$ 5,871$ 7,096$ 7,715$ 8,406$ 9,394$ 9,498$ 10,667$ 10,800$ 11,190$ $ 10,753 $ 11,075 $ 11,400 $ 11,731 $ 12,017 Accrued liabilities 8,906 8,162 15,705 12,822 13,802 12,239 12,995 14,131 13,343 14,014 14,691 12,733 13,114 13,499 13,891 14,230Advances and billings in excess of related costs 11,449 13,847 12,737 12,076 12,323 15,496 16,672 20,027 23,175 24,364 23,869 23,750 24,462 25,180 25,910 26,543Short-term debt and current portion of long-term debt 1,381 762 560 707 948 2,353 1,436 1,563 929 1,234 384 1,194 1,255 1,294 1,161 1,127

Total current liabilities 29,701 31,538 30,925 32,883 35,395 41,274 44,982 51,486 56,717 50,412 50,134 48430 49907 51373 52692 53916Deferred income taxes 0 1,190 0 182 607 2,780 4,485 6,267 8,603 2,392 1,338 1,608 1,932 2,322 2,790 3,353Accrued retiree health care 7,671 7,007 7,322 7,049 8,025 7,520 7,528 6,528 6,802 6,616 5,916 6,998 7,208 7,420 7,635 7,821Accrued pension plan liability, net 1,135 1,155 8,383 6,315 9,800 16,537 19,651 10,474 17,182 17,783 19,943 17,721 18,253 18,788 19,333 19,805Other long-term liabilities 391 516 337 537 592 907 1,429 950 1,208 2,078 2,221 1,626 1,675 1,724 1,774 1,817Long-term debt 8,157 7,455 6,952 12,217 11,473 10,018 8,973 8,072 8,141 8,730 9,568 8,932 8,692 8,889 9,091 9,298Shareholders' equity:

Common stock, par value $5.00 9,716 9,818 8,517 8,785 8,927 9,094 9,183 9,476 9,686 9,895 9,823 9,957 10,092 10,226 10,360 10,495Treasury stock, at cost (12,459) (14,842) (17,758) (15,911) (17,187) (16,603) (15,937) (17,671) (23,298) (29,568) (36,097) (42,097) (45,097) (46,097) (47,097) (48,097)Retained earnings 18,453 21,376 22,675 22,746 24,784 27,524 30,037 32,964 36,180 38,756 40,714 43,994 47,381 50,869 54,460 58,137Accumulated other comprehensive loss (8,217) (4,596) (13,525) (11,877) (13,758) (16,500) (17,416) (9,894) (13,903) (12,748) (13,623) (13,623) (13,623) (13,623) (13,623) (13,623)

Total shareholders' equity 4,739 9,004 (1,294) 2,128 2,766 3,515 5,867 14,875 8,665 6,335 817 (1,769) (1,248) 1,375 4,100 6,912Noncontrolling interests 0 0 0 97 96 93 100 122 125 62 60 94 94 94 94 94Total equity 2,225 2,862 3,608 5,967 14,997 8,790 6,397 877 (1,674) (1,153) 1,469 4,195 7,006Total liabilities and equity 51,794$ 58,986$ 53,779$ 62,053$ 68,565$ 79,986$ 88,896$ 92,663$ 99,198$ 94,408$ 89,997$ 83,641$ 86,513$ 91,986$ 97,510$ 103,017$

Boeing

Cash Flow Statement (Past)

Fiscal Years Ending Dec. 31 2014 2015 2016

Cash flows - operating activities:Net earnings 5,446$ 5,176$ 4,895$

Adjustments to reconcile net earnings to net cash provided by operating activities:

Non-cash items -

Share-based plans expense 195 189 190

Depreciation and amortization 1,906 1,833 1,910

Investment/asset impairment charges, net 229 167 90

Customer financing valuation benefit (28) (5) (7)

Loss on dispositions, net 10 1 7

Other charges and credits, net 317 364 369

Excess tax benefits from share-based payment arrangements (114) (157)

Changes in assets and liabilities -

Accounts receivable (1,328) (1,069) 112

Inventories, net of advances and progress billings (4,330) (1,110) 3,755

Accounts payable 1,339 (238) 622

Accrued liabilities (1,088) 2 726

Advances and billings in excess of related costs 3,145 1,192 (493)

Income taxes receivable, payable and deferred 1,325 477 (810)

Other long-term liabilities 36 46 (68)

Pension and other postretirement plans 1,186 2,470 153

Customer financing, net 578 167 (696)

Other 34 (142) (256)

Net cash provided by operating activities 8,858 9,363 10,499

Cash flows - investing activities:Property, plant and equipment additions (2,236) (2,450) (2,613)

Property, plant and equipment reductions 34 42 38

Acquisitions, net of cash acquired (163) (31) (297)

Contributions to investments (8,617) (2,036) (1,719)

Proceeds from investments 13,416 2,590 1,209

Other 33 39 2

Net cash (used)/provided by investing activities 2,467 (1,846) (3,380)

Cash flows - financing activities:New borrowings 962 1,746 1,325

Debt repayments (1,601) (885) (1,359)

Repayments of distribution rights and other asset financing (185) (24)

Stock options exercised 343 399 321

Excess tax benefits from share-based payment arrangements 114 157

Employee taxes on certain share-based payment arrangements (98) (96) (93)

Common shares repurchased (6,001) (6,751) (7,001)

Dividends paid (2,115) (2,490) (2,756)

Other (12)

Net cash used by financing activities (8,593) (7,920) (9,587)

Effect of exchange rate changes on cash and cash equivalents (87) (28) (33)

Net (decrease)/increase in cash and cash equivalents 2,645 (431) (2,501)

Cash and cash equivalents at beginning of year 9,088 11,733 11,302

Cash and cash equivalents at end of year 11,733$ 11,302$ 8,801$

Boeing

Cash Flow Statement

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E CV (2021)

Cash from Operating ActivitiesNet Earnings $ 6,703 $ 6,922 $ 7,129 $ 7,339 $ 7,515 Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization 2,123 2,184 2,246 2,308 2,371 Change in deferred taxes 203 244 293 352 423

Changes in working capital accounts:

Change in receivables 910 (237) (240) (243) (211)Change in inventories 1,079 (1,263) (1,274) (1,294) (1,122)Change in accounts payable (437) 322 325 330 286 Change in accrued liabilities (1,958) 382 385 391 339 Advances and billings in excess of related costs (119) 712 718 730 633 Other long-term liabilities (595) 49 49 50 43 Pension and other postretirement plans (1,139) 741 747 760 659 Customer financing, net 364 (105) (106) (107) (93)

Net cash provided by operating activities $ 7,132 $ 9,951 $ 10,274 $ 10,616 $ 10,843

Cash from Investing Activities:(Increase) decrease in short-term investments (34) (35) (36) (37) (38)(Increase) decrease in long-term investments (39) (41) (41) (42) (36)Capital expenditures, net of depreciation (2,115) (2,179) (2,243) (2,308) (2,364)Business acquisitions 0 0 0 0 0 (Increase) decrease in other assets (40) (41) (42) (43) (44)

Net Cash Used for Investing Activities $ (2,228) $ (2,295) $ (2,361) $ (2,429) $ (2,482)

Cash from Financing Activities:Changes in current portion of long-term debt 810 61 38 (132) (34)Proceeds from issuance (payments) of long-term debt (636) (240) 198 201 207 Payment of dividends (3,423) (3,535) (3,641) (3,748) (3,838)Proceeds from issuance of common stock 134 134 134 134 134 Repurchases of common stock (6,000) (3,000) (1,000) (1,000) (1,000)Changes in accumulated other comprhensive income 0 0 0 0 0 Proceeds from non-controlling interests 34 0 0 0 0

Net cash provided by financing activities $ (9,081) $ (6,579) $ (4,270) $ (4,545) $ (4,531)

Net increase (decrease) in Cash $ (4,176) $ 1,076 $ 3,642 $ 3,642 $ 3,830 Cash, beginning $ 8,801 $ 4,625 $ 5,701 $ 9,344 $ 12,986

Cash, ending $ 4,625 $ 5,701 $ 9,344 $ 12,986 $ 16,815

Boeing

Common Size Income Statement (%Sales)


Sales of products 88.90% 88.70% 89.24% 89.00% 89.00% 89.00% 89.00% 89.00%Sales of services 11.10% 11.30% 10.76% 11.00% 11.00% 11.00% 11.00% 11.00%

Total revenues 100% 100% 100% 100% 100% 100% 100% 100%

Cost of products -73.43% -74.51% -74.87% ‐71.71% ‐71.71% ‐71.71% ‐71.71% ‐71.71%Cost of services -8.96% -8.92% -8.48% ‐8.80% ‐8.80% ‐8.80% ‐8.80% ‐8.80%Depreciation of PP&E -1.56% -1.41% -1.50% ‐1.74% ‐1.76% ‐1.77% ‐1.78% ‐1.80%Amortization of intangibles -0.54% -0.50% -0.52% ‐0.53% ‐0.51% ‐0.50% ‐0.48% ‐0.47%Boeing Capital Corporation interest expense -0.08% -0.07% -0.06% ‐0.07% ‐0.07% ‐0.07% ‐0.07% ‐0.07%Total costs and expenses -84.56% -85.41% -85.43% ‐82.85% ‐82.84% ‐82.84% ‐82.84% ‐82.84%

Income from operating investments, net 0.32% 0.29% 0.32% 0.33% 0.33% 0.33% 0.33% 0.33%General and administrative expense -4.15% -3.67% -3.82% ‐3.80% ‐3.80% ‐3.80% ‐3.80% ‐3.80%Research and development expense, net -3.36% -3.47% -4.89% ‐3.82% ‐3.82% ‐3.82% ‐3.82% ‐3.82%Loss on dispositions, net -0.01% 0.00% -0.01% 0.01% 0.01% 0.01% 0.01% 0.01%Earnings from operations 8.23% 7.74% 6.17% 9.85% 9.86% 9.86% 9.87% 9.86%Other income/(loss), net 0.00% -0.01% 0.04% 0.03% 0.03% 0.03% 0.03% 0.03%Interest and debt expense -0.37% -0.29% -0.32% ‐0.34% ‐0.32% ‐0.32% ‐0.32% ‐0.32%Earnings before income taxes 7.86% 7.44% 5.89% 9.55% 9.57% 9.58% 9.58% 9.58%Income tax expense -1.86% -2.06% -0.71% ‐2.39% ‐2.39% ‐2.39% ‐2.40% ‐2.39%Net earnings 6.00% 5.39% 5.18% 7.16% 7.18% 7.18% 7.19% 7.18%

Boeing

Common Size Balance Sheet (%Sales)


AssetsCash and cash equivalents 12.93% 11.76% 9.31% 4.94% 5.91% 9.42% 12.72% 16.07%Short-term and other investments 1.50% 0.78% 1.30% 2.84% 2.84% 2.84% 2.84% 2.84%Accounts receivable, net 8.52% 9.07% 9.34% 8.46% 8.46% 8.46% 8.46% 8.46%Current portion of customer financing, net 0.21% 0.22% 0.45% 0.37% 0.36% 0.35% 0.34% 0.33%Inventories, net of advances and progress billings 51.51% 49.17% 45.68% 45.00% 45.00% 45.00% 45.00% 45.00%

Total current assets 74.68% 70.99% 66.08% 60.12% 61.08% 64.57% 67.86% 71.21%Customer financing, net 3.71% 3.49% 3.99% 3.73% 3.73% 3.73% 3.73% 3.73%Property, plant and equipment, net 12.13% 12.56% 13.54% 14.20% 14.29% 14.38% 14.45% 14.57%Goodwill 5.64% 5.33% 5.63% 5.61% 5.61% 5.61% 5.61% 5.61%Acquired intangible assets, net 3.16% 2.76% 2.69% 2.19% 1.61% 1.07% 0.56% 0.08%Deferred income taxes 7.25% 0.28% 0.35% 0.43% 0.50% 0.58% 0.68% 0.80%Investments 1.27% 1.34% 1.39% 1.45% 1.45% 1.45% 1.45% 1.45%Other assets, net of accumulated amortization 1.45% 1.46% 1.50% 1.88% 1.88% 1.88% 1.88% 1.88%

Total assets 109.29% 98.23% 95.16% 89.36% 89.74% 92.69% 95.49% 98.48%

Liabilities and equityAccounts payable 11.75% 11.24% 11.83% 11.49% 11.49% 11.49% 11.49% 11.49%Accrued liabilities 14.70% 14.58% 15.53% 13.60% 13.60% 13.60% 13.60% 13.60%Advances and billings in excess of related costs 25.53% 25.35% 25.24% 25.37% 25.37% 25.37% 25.37% 25.37%Short-term debt and current portion of long-term debt 1.02% 1.28% 0.41% 1.28% 1.30% 1.30% 1.14% 1.08%

Total current liabilities 62.49% 52.45% 53.01% 51.74% 51.77% 51.77% 51.60% 51.54%Deferred income taxes 9.48% 2.49% 1.41% 1.72% 2.00% 2.34% 2.73% 3.21%Accrued retiree health care 7.49% 6.88% 6.26% 7.48% 7.48% 7.48% 7.48% 7.48%Accrued pension plan liability, net 18.93% 18.50% 21.09% 18.93% 18.93% 18.93% 18.93% 18.93%Other long-term liabilities 1.33% 2.16% 2.35% 1.74% 1.74% 1.74% 1.74% 1.74%Long-term debt 8.97% 9.08% 10.12% 9.54% 9.02% 8.96% 8.90% 8.89%Shareholders' equity:

Common stock, par value 10.67% 10.30% 10.39% 10.64% 10.47% 10.30% 10.15% 10.03%Treasury stock, at cost -25.67% -30.76% -38.17% ‐44.98% ‐46.78% ‐46.45% ‐46.12% ‐45.98%Retained earnings 39.86% 40.32% 43.05% 47.00% 49.15% 51.26% 53.33% 55.58%Accumulated other comprehensive loss -15.32% -13.26% -14.41% ‐14.55% ‐14.13% ‐13.73% ‐13.34% ‐13.02%

Total shareholders' equity 9.55% 6.59% 0.86% ‐1.89% ‐1.29% 1.39% 4.02% 6.61%Noncontrolling interests 0.14% 0.06% 0.06% 0.10% 0.10% 0.10% 0.09% 0.09%Total equity 9.68% 6.66% 0.93% ‐1.79% ‐1.20% 1.48% 4.11% 6.70%Total liabilities and equity 109.29% 98.23% 95.16% 89.36% 89.74% 92.69% 95.49% 98.48%

Boeing

Value Driver Estimation


EBITA:Net Sales 90,762 96,114 94,571 93,600 96,406 99,236 102,112 104,606

- Cost of Products Sold (66,645) (71,613) (70,803) (67,122) (69,134) (71,164) (73,226) (75,014)

- Costs of Services (8,132) (8,578) (8,018) (8,238) (8,485) (8,734) (8,987) (9,207)

- BCC Interest Expense (69) (64) (59) (65) (64) (65) (67) (68)

- SG&A (3,767) (3,525) (3,616) (3,557) (3,663) (3,771) (3,880) (3,975)

- R&D (3,047) (3,331) (4,627) (3,571) (3,678) (3,786) (3,896) (3,991)

+ Implied Interest on Operating Leases 45 46 44 46 47 49 51 53

EBITA 9,147 9,049 7,492 11,092 11,429 11,765 12,107 12,403

Less: Adjusted Taxes:Provision for Income Taxes (1,691) (1,979) (673) (2,234) (2,307) (2,376) (2,446) (2,505)

- Tax on Investment Income 72 69 76 77 79 81 83 86

- Tax on Other Income (1) (3) 10 8 8 9 9 9

+ Loss on Dispositions Shield (3) (0) (2) (2) (2) (2) (2) (2)

+ Tax Shield on Interest Expense (83) (69) (77) (80) (77) (79) (81) (83)

+ Tax Shield on Implied Lease Interest 11 11 11 11 12 12 13 13

Adjusted Taxes (1,706) (1,983) (666) (2,231) (2,299) (2,367) (2,437) (2,495)

Plus: Change in Deferred Tax (DT) Liabilites (1,301) 100 (1,121) 203 244 293 352 423

NOPLAT: EBITA - Adjusted Taxes + Change in DT 6,140 7,166 5,706 9,064 9,373 9,691 10,022 10,331

Operating Current Assets:Normal Cash (lesser of actual or %) 1815 1922 1891 1872 1928 1985 2042 2092

Accounts Receivable, Net 7729 8713 8832 7922 8160 8400 8643 8854Current portion of customer financing, net 190 212 428 344 344 344 344 344

Inventory 46756 47257 43199 42120 43383 44656 45950 47073

Operating Current Assets 56490 58104 54350 52258 53814 55384 56979 58362

Operating Current Liabilities:Accounts Payable 10667 10800 11190 10753 11075 11400 11731 12017

Accrued Expenses 13343 14014 14691 12733 13114 13499 13891 14230

Advances and billings in excess of related costs 23175 24364 23869 23750 24462 25180 25910 26543

Operating Current Liabilities 47185 49178 49750 47236 48652 50080 51531 52790

Net Operating Working Capital 9,305 8,926 4,600 5,022 5,163 5,304 5,448 5,573

Plus: Net PPE 11,007 12,076 12,807 13,292 13,778 14,266 14,757 15,242

Plus: PV of Operating Leases 1,259 1,288 1,239 1,286 1,333 1,380 1,428 1,475

Plus: Acquired Intangibles 2,869 2,657 2,540 2,048 1,556 1,064 572 80

Plus: Customer financing, net 3,371 3,358 3,773 3,494 3,598 3,704 3,811 3,904

Less: Other Operating Liabilities 0 0 0 0 0 0 0 0

Invested Capital 27811 28305 24959 25141 25428 25718 26016 26274

NOPLAT 6,140 7,166 5,706 9,064 9,373 9,691 10,022 10,331

Beg. Invested Capital 25,945 27,811 28,305 24,959 25,141 25,428 25,718 26,016

ROIC 23.67% 25.77% 20.16% 36.32% 37.28% 38.11% 38.97% 39.71%

Beg. Invested Capital 25,945 27,811 28,305 24,959 25,141 25,428 25,718 26,016

Spread (ROIC‐WACC) 16.19% 18.29% 12.68% 28.84% 29.80% 30.63% 31.49% 32.23%

EP 4,199 5,086 3,588 7,197 7,493 7,789 8,098 8,385

NOPLAT 6,140 7,166 5,706 9,064 9,373 9,691 10,022 10,331

CapEx (∆ IC) 1,867 494 (3,346) 182 286 291 298 258

FCF 4,274 6,673 9,051 8,882 9,087 9,400 9,724 10,074

Boeing

Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity

Risk‐free rate 2.79%

Market Risk Premium 4.66%

Beta 1.079

Cost of Equity 7.82%

Cost of Debt

Pre‐tax 3.56%

Tax rate 25.00%

After‐tax Cost of Debt 2.67%

Market Value of Equity

Share Price $260.04

Shares Outstanding 607.60

Market Value of Equity $158,000

Market Value of Debt

STD & Current Portion LTD 384

LTD 9,568

PV Op. Leases 1,239

Market Value of Debt 11,191$

Market Weights

% Equity 93.39%

% Debt 6.61%

WACC 7.48%

Boeing

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

CV Growth 2.75%

CV ROIC 39.71%

WACC 7.48%


Normal Cash 2.00%

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E

DCF Model

NOPLAT 9,064 9,373 9,691 10,022 10,331

CapEx (∆ IC) 182 286 291 298 258

Free Cash Flow (FCF) 8,882 9,087 9,400 9,724 10,074

Continuing Value 203,262

Cash Flow to Discount 8,882 9,087 9,400 9,724 203,262

Discount Periods 1 2 3 4 4

PV of Cash Flows 8,264 7,866 7,571 7,287 152,312

Value of Operating Assets 183,299

Add: Excess Cash 6,910

Add: Marketable Securities 1,228

Add: Other non‐operating assets 1,416

Add: Long Term Investments 1,317

Less: Debt (9,952)

Less: PV of Operating Leases (1,239)

Less: ESOP (1,491)

Less: Pension Liability (25,859)

Value of Equity 155,629

Shares Outstanding 595

Intrinsic Value (per share) 261.56$

EP Model

NOPLAT 9,064 9,373 9,691 10,022 10,331

Beginning Invested Capital 24,959 25,141 25,428 25,718 26,016

ROIC 36.32% 37.28% 38.11% 38.97% 39.71%

WACC 7.48% 7.48% 7.48% 7.48% 7.48%

Economic Profit 7,197 7,493 7,789 8,098 8,385

Continuing Value 177,246

Cash Flow to Discount 7,197 7,493 7,789 8,098 177,246


PV of Cash Flows 6,696 6,486 6,273 6,068 132,817

Value of Economic Profit 158,340

+ Beginning Invested Capital (T=0) 24,959

Value of Operating Assets 183,299

Add: Excess Cash 6,910

Add: Marketable Securities 1,228

Add: Other non‐operating assets 1,416

Add: Long Term Investments 1,317

Less: Debt (9,952)

Less: PV of Operating Leases (1,239)

Less: ESOP (1,491)

Less: Pension Liability (25,859)

Value of Equity 155,629

Shares Outstanding 595

Intrinsic Value (per share) 261.56$

Model Date 11/8/2017

Next FYE 12/31/2017

Last FYE 12/31/2016

Days in FY 365

Days to FYE 312

Elapsed Fraction 0.855

Adjusted Target Price 274.41$

Boeing

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2017E 2018E 2019E 2020E 2021E

EPS 11.25 11.79 12.17 12.56 12.88

Key Assumptions

CV growth 2.50%

CV ROE 183.26%


Future Cash Flows

Dividends Per Share 5.74 6.02 6.22 6.41

Hypothetical Dividend (CV Year) 12.70

Future Cash Flows 5.74 6.02 6.22 6.41 238.73


Discounted Cash Flows 5.33 6.02 6.22 6.41 238.73

Intrinsic Value 262.71$

Model Date 11/8/2017

Next FYE 12/31/2017

Last FYE 12/31/2016

Days in FY 365

Days to FYE 312

Elapsed Fraction 0.855

Adjusted Target Price 275.62$

Boeing

Relative Valuation Models

EPS EPSTicker Company Price 2017E 2018E P/E 17 P/E 18

AIR‐FR Airbus SE $81.29 $3.24 $4.35 25.09 18.69

AM‐FR Dassault Avaiation SA $1,332.45 $51.13 $59.49 26.06 22.40

TXT‐US Textron Inc $53.70 $2.48 $2.87 21.65 18.71

GD‐US General Dynamics Co $212.51 $9.81 $10.54 21.66 20.16

HXL‐US Hexcel Corp $62.90 $2.68 $2.98 23.47 21.11 LMT Lockheed Martin $320.73 $12.64 $14.16 25.37 22.65

Average 23.88 20.62

BA Boeing $260.04 $11.25 $11.79 23.12 22.06

Implied Relative Value:

P/E (EPS17) $ 268.63

P/E (EPS18) 243.09$

Sensitivity Analysis

CV Growth of NOPLAT

274.41$ 2.45% 2.60% 2.75% 2.90% 3.05%

7.00% 293.04 301.62 310.80 320.66 331.26

7.25% 275.28 282.84 290.91 299.53 308.77

WACC 7.53% 257.39 264.00 271.02 278.50 286.48

7.75% 244.77 250.75 257.09 263.81 270.97

8.00% 231.58 236.93 242.59 248.58 254.93

CV ROIC

274.41$ 33.00% 35.00% 39.71% 41.00% 44.00%

‐2.46% 242.84 253.66 278.59 285.31 300.79

‐2.36% 241.18 251.87 276.50 283.14 298.43

Cap Ex % Sales ‐2.26% 239.51 250.08 274.41 280.97 296.07

‐2.16% 237.85 248.29 272.32 278.80 293.71

‐2.06% 236.19 246.50 270.24 276.63 291.35

Risk‐Free Rate

274.41$ 2.59% 2.69% 2.79% 2.89% 2.99%

4.86% 273.65 267.67 261.90 256.35 251.01

4.76% 280.38 274.13 268.13 262.35 256.78

Equity Risk Premium 4.66% 287.40 280.88 274.61 268.59 262.79

4.56% 294.73 287.92 281.38 275.09 269.05

4.46% 302.41 295.28 288.44 281.88 275.57

Tax Rate

274.41$ 15.00% 20.00% 25.00% 30.00% 35.00%

1.24 262.19 248.27 234.29 220.26 206.15

1.16 282.48 267.70 252.86 237.94 222.96

Beta 1.08 306.02 290.26 274.41 258.49 242.48

1.00 332.59 315.72 298.75 281.69 264.54

1.92 157.03 147.63 138.21 128.75 119.27

COGS as % Sales

274.41$ ‐79.00% ‐80.00% ‐80.57% ‐82.00% ‐83.00%

‐3.40% 322.07 298.72 285.42 252.02 228.67

‐3.60% 316.83 293.48 280.17 246.78 223.43

R&D as % Sales ‐3.82% 311.06 287.71 274.40 241.01 217.66

‐4.00% 306.33 282.98 269.67 236.28 212.93

‐4.20% 301.09 277.74 264.43 231.04 207.69

Boeing

Key Management Ratios


Formula

Liquidity RatiosCurrent Ratio (CA/CL) (Current Assets / Current Liabilites) 1.20 1.35 1.25 1.16 1.18 1.25 1.32 1.38

Quick Ratio (Cash + ST Investments + Recievables) / (Current Liabilities) 0.37 0.41 0.38 0.29 0.30 0.37 0.44 0.50

Cash Ratio (Cash / Current Liabilities) 0.21 0.22 0.18 0.10 0.11 0.18 0.25 0.31

Activity or Asset‐Management RatiosReceivables Turnover (Total Revenue / Beginning Recievables) 11.74 11.03 10.71 11.81 11.81 11.81 11.81 11.81

Days' Receivables (365 / Receivables Turnover) 31.08 33.09 34.09 30.89 30.89 30.89 30.89 30.89

Inventory Turnover (Cost of Products / Beginning Inventory) 1.43 1.52 1.64 1.59 1.59 1.59 1.59 1.59

Financial Leverage RatiosDebt Ratio (Total Debt / Total Assets) 0.09 0.11 0.11 0.12 0.11 0.11 0.11 0.10

Debt‐to‐Equity Ratio (Total Debt / Total Equity) 1.03 1.56 11.35 ‐6.05 ‐8.63 6.93 2.44 1.49

Profitability RatiosGross Margin (Total Revenue ‐ COGS) / (Total Revenue) 15.44% 14.59% 14.57% 17.15% 17.16% 17.16% 17.16% 17.16%

ROA (Net Income / Average Total Assets) 5.68% 5.35% 5.31% 7.72% 8.14% 7.99% 7.75% 7.49%

Profit Margin (Net Income / Total Revenue) 6.00% 5.39% 5.18% 7.16% 7.18% 7.18% 7.19% 7.18%

Payout Policy RatiosDividend Payout Ratio (Dividends / EPS) 41.50% 50.80% 60.91% 51.07% 51.07% 51.07% 51.07% 51.07%

Retention Ratio (1 ‐ Dividend Payout Ratio) 58.50% 49.20% 39.09% 48.93% 48.93% 48.93% 48.93% 48.93%

Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases

2017 233 2016 240 2015 221 2014 223 2013 212

2018 210 2017 217 2016 203 2015 171 2014 192

2019 182 2018 182 2017 175 2016 142 2015 135

2020 135 2019 157 2018 146 2017 120 2016 111

2021 95 2020 117 2019 123 2018 95 2017 94

Thereafter 620 Thereafter 603 Thereafter 620 Thereafter 650 Thereafter 644

Total Minimum Payments 1475 Total Minimum Payments 1516 Total Minimum Payments 1488 Total Minimum Payments 1401 Total Minimum Payments 1388

Less: Interest 236 Less: Interest 228 Less: Interest 229 Less: Interest 238 Less: Interest 235

PV of Minimum Payments 1239 PV of Minimum Payments 1288 PV of Minimum Payments 1259 PV of Minimum Payments 1163 PV of Minimum Payments 1153

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.56% Pre‐Tax Cost of Debt 3.56% Pre‐Tax Cost of Debt 3.56% Pre‐Tax Cost of Debt 3.56% Pre‐Tax Cost of Debt 3.56%

Number Years Implied by Year 6 Payment 6.5 Number Years Implied by Year 6 Payment 5.2 Number Years Implied by Year 6 Payment 5.0 Number Years Implied by Year 6 Payment 6.8 Number Years Implied by Year 6 Payment 6.9

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 233 225.0 1 240 231.7 1 221 213.4 1 223 215.3 1 212 204.7

2 210 195.8 2 217 202.3 2 203 189.3 2 171 159.4 2 192 179.0

3 182 163.9 3 182 163.9 3 175 157.6 3 142 127.8 3 135 121.5

4 135 117.4 4 157 136.5 4 146 126.9 4 120 104.3 4 111 96.5

5 95 79.7 5 117 98.2 5 123 103.3 5 95 79.7 5 94 78.9

6 & beyond 95 457.2 6 & beyond 117 455.1 6 & beyond 123 468.8 6 & beyond 95 476.8 6 & beyond 94 472.3

PV of Minimum Payments 1239.0 PV of Minimum Payments 1287.7 PV of Minimum Payments 1259.2 PV of Minimum Payments 1163.5 PV of Minimum Payments 1153.0

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 9

Average Time to Maturity (years): 4.67

Expected Annual Number of Options Exercised: 2

Current Average Strike Price: 72.60$

Cost of Equity: 7.82%

Current Stock Price: $260.04

2017E 2018E 2019E 2020E 2021E

Increase in Shares Outstanding: 2 2 2 2 2

Average Strike Price: 72.60$ 72.60$ 72.60$ 72.60$ 72.60$

Increase in Common Stock Account: 134 134 134 134 134

Change in Treasury Stock 6,000 3,000 1,000 1,000 1,000

Expected Price of Repurchased Shares: 260.04$ 280.38$ 302.31$ 325.95$ 351.45$

Number of Shares Repurchased: 23 11 3 3 3

Shares Outstanding (beginning of the year) 617 596 587 586 584

Plus: Shares Issued Through ESOP 2 2 2 2 2

Less: Shares Repurchased in Treasury 23 11 3 3 3

Shares Outstanding (end of the year) 596 587 586 584 583

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol BA

Current Stock Price $260.04

Risk Free Rate 2.79%

Current Dividend Yield 2.05%

Annualized St. Dev. of Stock Returns 20.02%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 9 72.60$ 4.67 172.59$ 1,491$

Total 9 72.60$ 4.67 196.31$ 1,491$

Important Disclaimer

This report was created by students enrolled in the Applied Equity Valuation (FIN: 4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

industrials boeing co. (nyse: ba) recommendation: hold · boeing $91,310 $157 22.2 7.33% 10.81$...

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