Analyst's Notes. Argus Recommendations

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1 Report created Jul 23, 2015 Page 1 OF 5 Boeing manufactures commercial jetliners and military aircraft as well as rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles, and advanced information and communication systems. The company was founded in 1916 and is based in Chicago. The shares are a component of the Dow Jones Industrial Average and the S&P 500. Analyst's Notes Analysis by John Eade and John DeFino, July 23, 2015 ARGUS RATING: BUY Attractively valued blue-chip Industrial Boeing once again topped Street EPS expectations in its 2Q earnings report, released on July 22. Management lowered guidance - but based on a charge. We see continued earnings surprises and share price gains for Boeing in the coming quarters. We are reiterating our BUY rating and $163 target price. INVESTMENT THESIS BUY-rated Boeing Co. (NYSE: BA) continues to benefit from strengthening demand in the commercial aerospace sector, as customers upgrade to more fuel-efficient and technologically advanced aircraft. Boeing is the largest aerospace and defense company in our coverage universe, and we believe that it has the best growth prospects due to its significant backlog and strong presence in the burgeoning commercial aerospace industry. The company's commercial aircraft backlog of $489 billion includes more than 5,700 aircraft orders, representing about eight years of production. We expect this division to be the primary growth driver for Boeing going forward as Defense, Space & Security continues to face revenue pressure. Based on our blended valuation analysis, BA shares appear attractive at current levels. Our 12-month target price is $163. RECENT DEVELOPMENTS BA shares have underperformed over the past quarter, falling 2.7% compared to a gain of 0.1% for the S&P 500. Over the past 12 months, the shares have outperformed, with a gain of 17.7%, compared to an increase of 6.4% for the index. The beta on BA is 0.7. Boeing topped Street expectations for earnings and revenues in its 2Q report, released on July 22. The blue-chip Industrial company posted consolidated 2Q15 revenue of $24.5 billion, up 11% from the prior-year period. Core EPS came to $1.62, down 33% from $2.42 in 2Q14 but above the consensus of $1.37. Core earnings included a $536 million after-tax charge ($0.77 per share), reflecting higher estimated costs for the KC-46 Tanker program. Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) 150 Rating EPS ($) Target Price: $ Week High: $ Week Low: $ Closed at $ on 7/17 Quarterly Annual ( Estimate) 9.25 ( Estimate) Revenue ($ in Bil.) Quarterly Annual ( Estimate) 98.1 ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dec BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Rating Weight Under Over Weight Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. HOLD-rated stocks are expected to perform in line with the market. SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 47% Buy, 47% Hold, 6% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Overview Price $ Target Price $ Week Price Range $ to $ Shares Outstanding Million Dividend $3.64 Overview Industrials Rating MARKET WEIGHT Total % of S&P 500 Cap % Financial Strength Financial Strength Rating MEDIUM-HIGH Debt/Capital Ratio 50.8% Return on Equity 92.9% Net Margin 5.6% Payout Ratio 0.46 Current Ratio 1.20 Revenue $94.94 Billion After-Tax Income $5.27 Billion Valuation Current FY P/E Prior FY P/E Price/Sales 1.07 Price/Book Book Value/Share $9.20 Capitalization $ Billion Forecasted Growth 1 Year EPS Growth Forecast -7.30% 5 Year EPS Growth Forecast 13.00% 1 Year Dividend Growth Forecast 24.66% Risk Beta 1.00 Institutional Ownership 74.67%

2 Report created Jul 23, 2015 Page 2 OF 5 The company delivered 197 commercial airplanes in the second quarter, up from 181 in 2Q14. Net orders came to $18 billion, resulting in a quarter-end backlog of $489 billion, down $6 billion from the end of 1Q15. On the 2Q conference call, management noted that lower oil prices have not changed customers' fleet planning or their commitments to existing deliveries. With respect to its Defense business, management noted that the Obama Administration's FY16 budget proposal included increases for a number of Boeing programs. Management also updated its 2015 guidance. It continues to expect revenues of $94.5-$96.5 billion, but lowered its core EPS forecast to $7.70-$7.90 from a prior $8.20-$8.40. This change reflected the KC-46 Tanker charge of $536 million. Management lowered its operating margin guidance to 9.0% from 9.5%-10%. It reiterated its forecast of commercial aircraft deliveries this year, up from 723 in 2014, and looks for commercial aircraft revenue of $64.5-$65.5 billion, implying 8%-9% growth. EARNINGS & GROWTH ANALYSIS Boeing organizes its operations into two manufacturing businesses - Commercial, and Defense, Space and Security -- as well as the Capital segment, which provides aircraft financing. Recent trends and outlooks for these businesses are discussed below: In the Commercial segment, revenues grew 18% year-over-year in 2Q to $16.9 billion, while operating profit fell 22% to $1.21 billion. The operating margin fell to 7.2% from 9.0%. Demand trends remain favorable for Boeing as customers continue to upgrade to more technologically advanced aircraft with improved fuel efficiency. In addition, airline profitability is improving and air traffic trends remain positive. Management projects demand for 38,000 new commercial aircraft over the next 20 years, up from its first-quarter estimate of 37,000. In 2Q15, Boeing recorded net orders for 171 commercial aircraft, up from 110 orders in 1Q15. Boeing's commercial backlog was $431 billion in 2Q15, down from $435 billion at the end of 1Q15. The backlog includes orders for more than 5,700 aircraft, representing about eight years of production. The Defense, Space and Security segment reported 2Q revenue of $7.5 billion, down 3% from the prior year. Operating profit of $546 million declined 6% from 2Q14, as the operating margin dipped to 7.3%. Revenues in the Boeing Military Aircraft business declined 1% to $3.5 billion. Operating profit decreased 25% to $123 million. The Network and Space Systems business reported revenue of $1.94 billion, up 1% year-over-year, and an operating profit of $151 million, up 1%. The Global Services and Support business reported revenue of $2.12 billion, down 8% from the prior year; while operating profit grew 1% to $272 million. The segment backlog was $58 billion at the end of the quarter, with orders from international customers representing about 39% of the total. The backlog was down from $60 billion at the end of 2Q15. Management noted on the call that international sales represented Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) Revenue 64,306 68,735 81,698 86,623 90,762 COGS 51,843 55,867 68,665 73,268 76,752 Gross Profit 12,463 12,868 13,033 13,355 14,010 SG&A 3,644 3,408 3,717 3,956 3,767 R&D 4,121 3,918 3,298 3,071 3,047 Operating Income 4,971 5,844 6,290 6,562 7,473 Interest Expense Pretax Income 4,507 5,393 5,910 6,232 7,137 Income Taxes 1,196 1,382 2,007 1,646 1,691 Tax Rate (%) Net Income 3,307 4,018 3,900 4,585 5,446 Diluted Shares Outstanding EPS Dividend GROWTH RATES (%) Revenue Operating Income Net Income EPS Dividend Sustainable Growth Rate VALUATION ANALYSIS Price: High $91.50 $91.50 $78.42 $ $ Price: Low $55.00 $59.13 $67.28 $72.75 $ Price/Sales: High-Low P/E: High-Low Price/Cash Flow: High-Low Financial & Risk Analysis FINANCIAL STRENGTH Cash ($ in Millions) 10,341 9,088 11,733 Working Capital ($ in Millions) 12,327 13,588 11,068 Current Ratio LT Debt/Equity Ratio (%) Total Debt/Equity Ratio (%) RATIOS (%) Gross Profit Margin Operating Margin Net Margin Return On Assets Return On Equity RISK ANALYSIS Cash Cycle (days) Cash Flow/Cap Ex Oper. Income/Int. Exp. (ratio) Payout Ratio 16.3 The data contained on this page of this report has been provided by Morningstar, Inc. ( 2015 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

3 Report created Jul 23, 2015 Page 3 OF 5 33% of segment revenue and 39% of the backlog. At the end of 1Q15, Boeing Capital's net portfolio balance was $3.3 billion, down from $3.4 billion a year earlier. Boeing Capital reported revenue of $115 million, up from $90 million in 2Q14, and operating income of $11 million, down from $33 million a year earlier. Based on the impact of the $536 million 2015 KC-46 Tanker charge, we are lowering our 2015 EPS estimate to $8.00 from $8.55. While our estimate remains above management's revised guidance range, we note that Boeing has a history of underpromising and overdelivering. As the company continues to ramp up its 737, 777, and 787 production lines, we expect further expansion in operating margins next year. We are maintaining our 2016 diluted EPS estimate of $9.25, based on our expectations for 3-4% revenue growth, increased operating efficiency, and further share buybacks. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating on Boeing is Medium-High, the second-highest rank on our five-point scale. The company scores above-average on our key criteria of debt levels, fixed-cost coverage and profitability. The company had $9.6 billion in cash and liquid investments at the end of 2Q15, flat with the end of 1Q15. Total debt was $9.0 billion, also flat with the prior quarter. The company's debt-to-capital ratio remained steady 58.9%. Boeing has a share repurchase program. It repurchased 14 million shares for $2.0 billion in 2Q15 and expects to use the $7.5 billion remaining on its repurchase authorization over the next two years. The company also pays a dividend, which it raised by 25% in December The quarterly payout is $0.91, or $3.64 annually, for a yield of about 2.5%. We think the dividend is secure and expect it to grow. Our dividend estimates are $3.64 for 2015 and $4.20 for MANAGEMENT & RISKS Boeing recently named Dennis Muilenburg, 51, as its new CEO, succeeding James McNerney, 65, who remains the company's chairman. Mr. Muilenburg previously served as Boeing's vice chairman and chief operating officer. Greg Smith serves as CFO. Investors in BA shares face numerous risks. The company is vulnerable to another downturn in the commercial aviation market, though the geographic diversification of its product portfolio provides some stability. Much of the company's backlog consists of orders from rapidly growing international customers. The company is still working to wring profits from its 787 Dreamliner program. In the second quarter, the deferred production cost balance rose an additional $797 million to $27.8 billion, and management cautioned that the balance would grow in 3Q before declining in the fourth quarter. Management expects the deferred costs to decline - and cash flow to increase - in Peer & Industry Analysis The graphics in this section are designed to allow investors to compare BA versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. The scatterplot shows how BA stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. The table builds on the scatterplot by displaying more financial information. The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how BA might fit into or modify a diversified portfolio. P/E NOC Value GD LMT RTN 5-yr Growth Rate(%) COL BA OA Growth 5-yr Net 1-yr EPS Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating BA Boeing Co 101, BUY LMT Lockheed Martin Corp 63, BUY GD General Dynamics Corp 47, HOLD NOC Northrop Grumman Corp 32, BUY RTN Raytheon Co 29, HOLD COL Rockwell Collins Inc 11, BUY OA Orbital ATK Inc 4, HOLD Peer Average 41, P/E Price/Sales Price/Book PEG 5 Year Growth Debt/Capital

4 Report created Jul 23, 2015 Page 4 OF 5 Like most military contractors, Boeing also faces risks related to the cancellation or curtailment of new and existing Defense Department contracts. However, during Boeing's earnings call, CEO Muilenburg stated that Boeing has seen solid support for its Defense, Space and Security programs. Congress has been supportive of the Obama administration's fiscal 2016 budget request, which increases appropriations for Boeing's core production programs. We note, however, that Boeing's revenue mix is less dependent on Defense spending than that of most peers. We estimate that less than 10% of Boeing's revenues are from DOD contracts. Boeing is taking steps to mitigate risks associated with its pension obligations. In 2014, it extended two union contracts, both involving a change from a defined benefit pension plan to a defined contribution plan. After an initial transition phase, 90% of Boeing's workforce will be covered by a defined contribution plan, up from 15% at the beginning of the year. COMPANY DESCRIPTION Boeing manufactures commercial jetliners and military aircraft as well as rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles, and advanced information and communication systems. The company was founded in 1916 and is based in Chicago. The shares are a component of the Dow Jones Industrial Average and the S&P 500. VALUATION VALUATION We think that BA shares are attractively valued at current prices near $147, toward the high end of their 52-week range of $116-$159. The stock has pulled back 8% from its all-time high of $ in February However, we see potential positive EPS surprises and share gains ahead. To value the stock on a fundamental basis, we use a peer and multiple comparison model. BA shares are trading at 15.9-times projected 2016 earnings, below the midpoint of the historical range of However, on a price/sales basis, the shares are trading close to the top of the five-year range. The dividend yield of about 2.5% is above the midpoint of the five-year range and above the peer average. Compared to the peer group, Boeing's valuation metrics are generally below the industry average, though we think the shares deserve a premium. Our 12-month target price of $163 implies a multiple of 17.6-times our EPS forecast for On July 23 at midday, BUY-rated BA traded at $147.40, up $0.93.

5 METHODOLOGY & DISCLAIMERS Report created Jul 23, 2015 Page 5 OF 5 About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Strategist. A HOLD-rated stock is expected to perform in line with the S&P 500. A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Morningstar Disclaimer 2015 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.