How do I determine the value of a stock?

So you are interested in purchasing a stock, you go to google and they tell you that the company is currently trading at $154 dollars per share. How do you know if you are getting a good deal? Is this stock under valued or over valued?

Today we are going to look at a giant in the aviation industry…..Boeing! At the time of current writing, Boeing is trading at $154. Do you think that’s a good price to buy into the stock?

Let’s look at a few ways we can break it down.

Look at historical data

Here is the stock price data of Boeing from as far back as I could gather. From what you see up there, it’s peak was at $446.01 and right now it’s at $154. Sounds like a discount to me don’t you think? I’m guessing that is what most people would do and they would make a decision right here, based on what they see on the chart.

Is there more we can look at to make an informed decision?

There are many other metrics we can use to allow for a more informed decision. First let’s looks at what is the EPS of Boeing.

What is EPS you might ask? EPS stand for Earnings Per Share. It is a great metric to look at, to see how profitable a company is in relation to how many shares there are in the market. Think of it this way.

You have Company A who made a profit of $300 last year. In comparison, Company B made a profit of $400. Without looking at anything else, you would say Company B is a better deal right?

However if you look at their shares, Company A only has 2 shares and company B has 4 shares. So what would their earnings per share look like?

EPS = Net income ÷ Total shares

Company A EPS = $300 ÷ 2 = $150

Company B EPS = $400 ÷ 4 = $100

Now who is the better deal? Suddenly Company A looks better right? Though they made less profit last year, they also shared that profit with less people.

So what is the EPS for Boeing in 2019?

If you look at the historic EPS for Boeing, it seems like it was doing well in 2017 and 2018 with an increase from $13.85 to $17.85.

But if you look closer, you see that 2019 is a horrible year for Boeing, where the EPS showed a negative $1.12. Do note that this report was released at the end of Dec 2019. That means, it does not even account for the current COVID-19 situation (we will wait for the 10-Q for an update on the impact of that). Leave your comments below on Why was Boeing making a loss in 2019?

If I have all the time in world, I would like to look a little further than the last 3 years to give me a better understanding of what their current EPS means to me. Here’s some data I managed to find for the EPS of Boeing for the last 5 years. (do note there are some discrepancies in 2017. But it’s close enough to give us an idea of what’s happening)

Thanks Mr Kua Simi, I have everything I need to go invest in the stock market now!

Hold your horses. Knowing the EPS of a company does not really mean anything if you have not compared it to the stock price. The metric you want to look at is Price to Earning (PE) ratio. The PE ratio would give you generally guide in the price of the stock and if it is over or undervalued.

Let’s looks at the following example.

Price to Earning (PE) = Share Price ÷ EPS

If you were to compare Company A vs Company B now. Would you rather buy the shares of Company A or Company B?

Basically the lower the PE ratio the better right? Buying Company B means you are paying less for a particular share for a higher amount of earnings. Here is a screen shot of the PE of Boeing from yahoo finance.

Looking at the Trailing P/E in 2019 you can see it on an increasing trend. This indicates that the stock is getting more and more overvalued. Bo hua la !

This tells us that either the company earnings are taking a hit or stock prices are shooting up significantly. So do you think it’s the stock price on a rise or the company earnings taking a hit? Leave your comments below.

“Mr Kua Simi, what about the COVID-19 situation? You say all these reports does not account for the current COVID-19 thing right?”

That’s correct! For you to forecast the impact of what’s happening right now or what is about to happen you need to look at Forward PE.

Forward PE caters for the forecasted Earnings per Share. It’s important that those numbers are FORECASTED and does not necessarily mean it will hold true. If you were to look at the current Forward PE for this quarter you can see that is has jumped to 98.04! That’s a clear indication of the potential impact of COVID-19 to the company’s earnings. Something tells me their bottom line is going to be in the RED big time.

Swee la, we looked at their historic PE and their forward PE… Now can I go buy the shares already anot?

Once again HOLD YOUR HORSES! To extract more from those PE numbers, you also want to compare it to the PE of its competitors. So who should we compare Boeing to? Let’s get an idea of where Boeing make the bulk of their money first.

As shown above, Boeing makes the majority of its revenue from making and selling commercial airplanes. Want to hazard a guess, who is their direct competitor in this category? If you said Airbus you are correct!

Let’s compare PE ratios

Comparing the two company’s metrics which do you think is a better deal? Leave your comments below.

Conclusion

Today we learnt to look at some numbers, and tried to make sense of what they meant to us. However these numbers are just the baseline for you to dig further into a company.

At the end of the day it’s important to understand the business and read through their 10-K to have a good grasp of the business and what affects their ability to make profits. If you would like to read the reports for Boeing and Airbus you can use these links.

“So Mr Kua Simi, you got buy anot?”

With the current market swings you probably could have made some money day trading those swings. However based on the latest annual reports there are many red flags which is telling me to stay away.

For me to part with my hard earned money, I would need to dig further into the 10-K and I would have to find something in there which can assure me that the company is able to turn things around in the future. If not, for now my money stays in the milo tin under my bed.