Boeing Shares Upgraded to 'Buy'

CHICAGO (TheStreet) -- TheStreet.com's stock-rating model upgraded aerospace and defense contractor Boeing(BA Quote) to "buy."

The numbers: Boeing's second-quarter net income increased 17% to $998 million and earnings per share climbed 22% to $1.41. Revenue grew 1% to $17 billion. The company's gross margin rose from 20% to 22%, and its operating margin expanded from 7% to 9%. Boeing has a weak financial position, with $4.8 billion of cash and $9.1 billion of debt. A quick ratio of 0.4 demonstrates less-than-ideal liquidity. We give Boeing a financial strength score of 2 out of 10, less than the "buy"-list average of 7.

The stock: Boeing has advanced 22% this year, more than the Dow Jones Industrial Average and S&P 500 Index. The stock trades at a price-to-earnings ratio of 17, a discount to the market, but a premium to aerospace and defense peers. The shares pay a 3.2% dividend yield, higher than the S&P 500 average of 2.8%.

Industry comparison: Despite its premium price, Boeing remains an attractive aerospace and defense play. Based on trailing earnings, its shares are more expensive than those of large-cap competitors, such as United Technologies(UTX Quote), General Dynamics(GD Quote) and Raytheon(RTN Quote). However, Boeing offers a bigger dividend yield than these companies. And a payout ratio of 41% means the dividend is not only safe, but has room to grow.

Risks: TheStreet.com Ratings makes investment recommendations assuming a long-term holding period. Boeing is subject to unique industry pressures since it derives a substantial portion of its revenue from the U.S. government. Political uncertainty, troubles in the airline industry, delays on the 787 Dreamliner project and a credit downgrade by Moody's(MCO Quote) are areas of concern.

Outlook: Competitors Lockheed Martin(LMT Quote) and Northrop Grumman(NOC Quote) report third-quarter results next week. Boeing will report its third-quarter performance before the market opens on Oct. 21, which should show how the company is faring under the strain of economic weakness and cost-cutting at the Department of Defense.

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