Phil mentioned this article in the morning, and thanks to Paul for allowing us to post his work. It should be possible to make this trade, the shares are only down a little from when this article was written (closing at 77.31 today) – Ilene
‘Take Off’ with Boeing Option Combination Plays 
Courtesy of Paul Price
Concern about delivery delays in Boeing’s (BA) newest 787 Dreamliner has hurt BA shares. The stock has come down 27.5% from its July 2007 high, despite the fact that last year’s earnings were $5.26 – the highest ever.
After processing the latest news 2008 and 2009, estimates now center around $5.96 and $6.80 meaning BA shares are trading at just 13.1 times this year’s and 11.5x 2009 projections. Value Line sees 3- 5 year EPS of $9.00 once the new Dreamliner aircraft is fully in delivery mode.
Boeing’s 10-year median P/E has been 21 but with cyclical stocks you need to adjust for ‘normalized’ earnings power rather than just look at current year earnings. Value Line sees a long term multiple of 15 as typical. I think that’s reasonable for Boeing based on sustainable earnings power.
Fifteen times this year’s estimate of $5.96 would bring BA shares back to $89.40 by year end and to $102 by December 2009. Here are the per share numbers* from the past five years.
Year…..….Sales……Cash Flow……..EPS……. idend…..Avg. Yield
2007….…$90.12…..…$7.53………..$5
2006….…$81.19…..…$5.78………..$5
2005….…$72.11…..…$4.50………..$2
2004…….$66.13……..$3.57………..$1
2003…….$63.08……..$2.82………..$1
*Source: Value Line
Buyers at last year’s peak price of $107.80 were too enthusiastic with future prospects and overpaid at 20.5x full year 2007 EPS. Today you can own these same shares for just 13.1x current year estimates.
Value Line rates Boeing’s financial strength at ‘A++’ and gives them a #1 rating [their highest] for Safety. Government subsidized Airbus is the only true competitor large enough to ever threaten Boeing’s place in the commercial airline business. There clearly seems to be room for both, yet huge barriers to entry for any new producers.
If Boeing shares hit my year-end 2009 target of $102 we’ll see capital gains of 30.5% on top of the 3.1% yield over those 19 months. A 33.6% total return potential on these high quality shares looks attractive to me as it annualizes at about 21%.
For option savvy investors here are two relatively low-risk option combinations to consider:
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…….……………………………..Cash Outlay………………..Cash Inflow
Buy 100 shares of Boeing @ $78.12 …………………………$7,812
Sell 1 BA Jan. 2009 $80 Call @ 6.60/sh……..……………..$660
Sell 1 BA Jan. 2009 $80 Put @ $8.10/sh……………………$810
Net Cash Out-of-Pocket………………………………………..$6,342
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If Boeing shares are at least $80 /share on expiration date [+ 2.5% from our starting price]:
- Your shares willed will called [sold] for $8000.
- Your put will expire worthless [a good thing for you as a seller].
- You will own no shares, no options, and hold $8000 cash.
- You will have received two quarterly dividends of $40 each.
You will have a net profit of $1738 [including div.] on your cash outlay of $6,342.
That’s a cash-on-cash return of 27.4% in < seven months on shares that only needed to go up 2.5% from your starting point.
Risk?
Your break-even on the stock you bought is $78.12 less your call premium received of $6.60 = $71.52 /share.
Your break-even on the puts is the strike price of $80 less the $8.10 put premium = $71.90 /share.
Overall break-even = $71.71 share. That means even if BA shares dropped by $6.41 or 8.2% you’d still be ok or making money.
If you’re willing to commit to January of 2010:
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………………………….….Cash Outlay………………..…Cash Inflow
Buy 100 shares of Boeing @ $78.12 …………..…….$7,812
Sell 1 BA Jan. 2010 $80 Call @ 11.50/sh……………$1,150
Sell 1 BA Jan. 2009 $80 Put @ $12.10/sh………..…$1,210
Net Cash Out-of-Pocket………………………………………$5,452
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If Boeing shares are at least $80 /share on expiration date [+ 2.5% from our starting price]:
- Your shares willed will called [sold] for $8,000.
- Your put will expire worthless [a good thing for you as a seller].
- You will own no shares, no options, and hold $8,000 cash.
- You will have received six quarterly dividends of $40 each.
You will have a net profit of $2,788 [including div.] on your cash outlay of $5,452.
That’s a cash-on-cash return of 51.1% in < 19 months on shares that only needed to go up 2.5% from your starting point.
Risk?
Your break-even on the stock you bought is $78.12 less your call premium received of $11.50 = $66.62 /share.
Your break-even on the puts is the strike price of $80 less the $12.10 put premium = $67.90 /share.
Overall break-even = $67.26 share. That means even if BA shares dropped by $10.86 or 13.9% you’d still be ok or making money.
