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Krause Fund Research Fall 2018

Industrials Recommendation: HOLD Analysts

Andrew Straight Andrew Rasmussen andrew-straight@uiowa.edu andrew-rasmussen@uiowa.edu

Joseph Tomczuk Erik Miller joseph-tomczuk@uiowa.edu erik-miller@uiowa.edu

Company Overview The Boeing Company (BA) is the leading global aircraft manufacturer in the Aerospace & Defense industry, with more than 10,000 aircraft currently in service. The company operates in four main business segments: Commercial Airplanes, Defense, Space & Security, Global Services, and Boeing Capital. Boeing’s primary products are commercial and military aircraft, while also producing other items such as satellites and defense systems. Boeing is committed to delivering superior design, efficiency and value to their customers while also priding themselves in having customers in over 150 different countries around the world. Boeing continues to grow in the right direction since Dennis Muilenburg took over as CEO in 2015. The company has seen substantial growth and has continued to exceed expectations. Stock Performance Highlights 52 Week High $394.28 52 Week Low $259.56 Beta Value 1.12 Average Daily Volume 3.58M Share Highlights Market Capitalization $211.265B Shares Outstanding 591M EPS (2017) $13.60 P/E Ratio (2017) 21.56 Dividend Yield 2.00% Dividend Payout Ratio 46.68% Company Performance Highlights ROA 8.99% ROE 1,003.30% Profit Margin 8.78% Sales $93.39B Financial Ratios Current Ratio 1.16 Debt to Equity 26.98

The Boeing Company (NYSE: BA)

November 9, 2018

Current Price $369 Target Price $380-390

Boeing Efficiency Leads to Growth

Commercial Airplane segment is growing due to increased demand in air travel. In 2017, the number of air travel passengers exceeded 4 billion annually for the first time ever. An increase in the United States Defense budget and increased geopolitical tension around the world offers new growth opportunities for the Defense sector. While revenue’s remained steady from 2016 to 2017, Boeing’s operating margins improved from 6.2% to 11.0% due to increased focus on cost efficiency, especially in the Commercial Airplanes segment. Boeing is expanding their production process and shifting product mix in order to satisfy new demand trends. By 2019, they will increase their production rates of the 737 from 52 to 57 per month, and the 787 from 12 to 14 per month. As demand for these popular aircraft grow, so does Boeing’s capacity to produce them.

Boeing plans to grow the Global Services segment to an aspirational $50B of annual revenues in the next 10 years due to increased demand for improved efficiency and innovative solutions in an expanding market.

With a focus on fuel-efficiency, Boeing has designed a new jet, the 777X, which will be the largest and most fuel-efficient jet in the world. The first delivery is targeted for 2020. One Year Stock Performance

(Source: Yahoo Finance)

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REAL GROSS DOMESTIC PRODUCT (GDP) Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. Real GDP is widely recognized as a leading indicator of economic growth. Unlike Nominal GDP, Real GDP accounts for fluctuations in price level and delivers a more precise figure of economic growth.

(Source: U.S. Bureau of Economic Analysis)

Strong GDP growth over the past year and a half has spurred new investment opportunities, increased consumer confidence, and lowered unemployment rates to record lows within the US economy. Although equity markets are currently experiencing some unsettling volatility, fundamentals of the economy remain strong with GDP growth slightly above 4% and 3% in Q2 & Q3 of 2018 respectively. The Industrials sector is very cyclical and especially sensitive to changes in the overall market. The Industrial Production Index (IPI) measures the real production output of manufacturing, mining, and utilities. Historically, growth in the IPI has had a positive correlation with real GDP growth.

(Source: St. Louis Federal Reserve13)

This correlation projects well for the Industrials sector as a whole looking forward, as we believe there will continue to be strong Real GDP growth within the U.S. economy. We anticipate Real GDP to increase by 3.0% and 3.25% in the short and long-run, respectively. This is a reflection of the strong fundamental drivers in the market, in addition to recent

external factors mitigating potential risk looking forward. Current employment data supports our hypothesis with the unemployment rate approaching record lows, paired with an increasing labor force participation rate. It is no surprise that economic growth and development is a pillar of the current Trump administration. Over 2 million jobs were created in 2017 alone, and the implementation of the Tax Cuts and Jobs Act of 2017 reinforce commitment to a continuous improvement of our economy. We project that trade uncertainties and inconsistencies with the market will fade over the long run. Long-term growth will be a byproduct of the foundation built over the last few years and an optimistic workforce that is illustrated by the increasing labor force participation rate and consumer confidence levels. This strong growth bodes well for the Industrials sector overall, as Industrial production output has a positive correlation with the market. FUEL PRICES Fuel and oil prices are key factors in the economy, especially due to the impact fuel has on manufacturing and production process. The lower the price of oil, the lower the cost of manufacturing goods, which in turn will improve a companies’ profit margins. While oil prices have remained fairly steady over the last few years, barrel prices have started to see a slight increase. In 2018, the barrel price of WTI crude oil has remained within a $60-$72 gap as is currently priced at $60.19 per barrel.

(Source: St. Louis Federal Reserve13)

The graph above also illustrates what some researchers believe; crude oil will soon return to its historical average price of $75-$100 a barrel, despite reaching a low price of $26.55 in 20163. Due to factors such as oil supply, natural disasters, and other world events, oil prices could rise exponentially within the next 20-50 years, especially due to supply shortages3. This uncertainty poses a threat, but because of this reason there have been shifts in capital expenditures towards research & development within the Industrials Sector. Many companies have put forth efforts to increase their fuel capacity through more environmentally safe and efficient products, which will help both the bottom line and the environment. Even so, oil prices are expected to remain steady for the foreseeable future. This is a key factor within the airline industry itself, as companies demand more fuel efficient products while seeking cost efficiency.

Economic Outlook

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INTEREST RATES Interest rates are one of the most important aspects of the economy, influencing many decisions including borrowing and expected return on investments22. Interest rates can be influential in an economy to accelerate or slow down growth because of its direct impact on the cost of borrowing. The U.S has experienced a record low rate environment the previous 10 years in order to promote growth and expansion within the economy post-great recession. Looking ahead, the Federal Funds Rate (FFR) increased rates three times in 2018, to a current benchmark of 2-2.25%, with signals pointing towards a fourth increase of 25 basis points before year end30. Changes in the FFR have a primarily direct relationship with the 10-year treasury, which is commonly used as the risk-free-rate for borrowing when analyzing different investment opportunities.

(Source: St. Louis Federal Reserve13)

Due to the nature of business and equipment within the Industrials Sector as a whole, companies rely heavily on borrowing to fund much of their capital expenditures. The Fed has been relatively transparent about their plan of gradually increasing rates until reaching a neutral level—which Fed Chair Jerome Powell has mentioned we are not near yet. While President Trump has been vocal about his personal negative view on the potential for continued future rate hikes, the Fed has not changed their stance going forward. We project that rates will increase once more in 2018, and three times in 2019 because of continued strong fundamentals and growth in the economy. While some may fear interest rates increasing as a negative, we recognize that it is a necessity to offset potential inflation and other adverse effects of a booming economy. We believe that markets are already anticipating the rate hike(s), and that a decrease in future overall capital expenditures will not be dramatic. TAX CONSIDERATIONS In December of 2017, the Tax Cuts and Job Acts (TJCA) was signed into law and has become the largest tax overhaul since 1986. The TCJA will introduce a number of changes to the way that business are taxed. The TCJA will reduce the business sector’s tax liability by the decreasing the corporate tax rate5.

(Source: Tax Foundation, Taxes and Growth Model, Nov 201725)

In the short run, GDP is projected to grow 0.44% above baseline projections as firms utilize the immediate expensing of short-lived assets and lower tax rates5. This should promote capital expenditures, which promotes economic growth. This initial growth will likely reduce in a few years due to the temporary nature of many of the provisions. However, because economic growth is borrowed from the future, the plan still expects economic growth to surge over the long-run. Beyond the first decade, the plan aims to broaden both income and payroll tax base to make up for revenue shortfall and cover the cost of the plan. In the end, this new tax policy will affect the economy in a few different ways: shifting demand for goods & services, changing budget deficits, and affecting incentives to work, save, and invest. We see this as yet another positive sign for the economy, which will contribute to strong future GDP growth. CONSUMER CONFIDENCE Consumer confidence is another key indicator of the state of the economy because it is based on consumers’ thoughts on the current and future state of the economy. Industrial production has historically been highly correlated with consumer confidence. When people feel better about the economy, they feel they can spend more on industrial goods and services. There are two ways of analyzing consumer confidence level11: the Consumer Confidence Index (CCI) and the Michigan Consumer Sentiment Index (MSCI). The Consumer Confidence Index is conducted by a 5,000 household survey by the Conference Board. The CCI is based on a benchmark score of 100 from the year 1985. As of October 2018, the CCI stands at 137.9, the highest score of all time10. The Michigan Consumer Sentiment Index is conducted by the University of Michigan through a survey of 500 households, a very similar process to the CCI. The MSCI reflects the roughly the same data as the CCI and accounts for outliers by removing the most and least favorable replies. The following graph depicts the MSCI, and similarly to the CCI, the index is near all-time highs.

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(Source: (St. Louis Federal Reserve13)

We can expect consumer confidence to remain high due to a large degree of optimism surrounding the soaring markets. While many believe that a market shift may occur in the near future, the consumer confidence index surveys have displayed no sign of this, proving consumers’ optimism. This optimism is a key driver of our future projections because consumers have weathered equity market volatility and political uncertainty, with little impact on their confidence. UNEMPLOYMENT The unemployment rate is generally viewed as a laggard representation of overall economic health. The current 3.7% unemployment rate is approaching record levels for the past half-century. While this can bring optimism and reassurance for representing a strong underlying economy, concerns may arise over some of the negative effects that low unemployment may signify.

(Source: St. Louis Federal Reserve13)

One threat that low unemployment over an extended period of time poses is inflated wages. In order to attract and retain top talent with a more limited pool of candidates, companies are looking to raise wages to ensure stability in their workforce. As recently as last October, Amazon pledged to raise their minimum wage to $15 per hour with hopes to “encourage major competitors to do the same”. Increasing wages pose a threat to the Industrials sector as employees may flee to less labor-intensive jobs with comparable compensation packages. Wage push has the potential for an inflation domino effect where in order for companies to afford increasing their compensation to employees, they may have to increase the cost of their goods and services. Inflated wages increase demand among products as the consumer’s money supply increases, leading to overall increases in the price of those goods. Therefore we see these low unemployment levels having both positive and negative effects on our economic outlook.

CAPITAL MARKETS OUTLOOK Based on the information above and current economic conditions, we believe that the future capital markets outlook is positive in the near future. Our economy has taken advantage of opportunities such as new tax laws, increased government spending, and higher consumer confidence, all contributing towards strong and stable GDP growth. Potential trade conflict and inflation may pose threats in the future. With that being said, the Fed has followed through on their commitment to carefully monitor interest rates and taking appropriate action to mitigate overheating. The Trump Administration is approaching trade negotiations with a different attitude and techniques than past leaders. We believe that while this may have a potential negative effect on certain areas of the economy in the short-run, past actions have not and will not lead to long-term disaster. We also believe that the recent midterm election result of a split congress and senate will mitigate any future unexpected volatility that may have occurred the last two years. The certainty in knowing that extreme policy will not be put forward to action will provide stability to the markets in the future. INDUSTRY OVERVIEW The Aerospace and Defense segment is a part of the Industrials sector and is comprised of two similar, yet different segments: Aerospace and Defense. Aerospace is primarily driven by the production, sale, and leasing of commercial aircrafts. Defense is driven by the states need or willingness to spend on military weapons, systems, and space ventures. Aerospace & Defense, historically, is very cyclical, and typically follows the overall trends of the economy with the exception for war; in which defense spending drastically increases. INDUSTRY TRENDS The industry is being driven by increased demand for aircraft, especially in emerging markets such as Asia, Middle East, Eastern Europe, Latin America, China, and India. Fleet sizes must increase to meet demand which has in turn caused aircraft manufacturers to continue to raise their long-term projections. Another key trend causing a demand increase is airlines are starting to replace their aging and less fuel-efficient aircraft. Fuel efficiency is a key factor in what drives this industry in both production and services. Another key factor in industry growth is the new budget proposal for U.S. Military and Defense spending. On February 9th, 2018 President Trump signed the spending bill for 2018 which established an overall governmental spending budget of $1.132 trillion, up from 2017’s budget of $1.070 trillion. Defense spending budget for 2018 was set with a $54 billion increase from 2017, and is projected to increase even

Industry Analysis

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more in 2019. One of President Trump’s main goals has been to ramp up our national defense to better secure our borders and upgrade our nation’s missile defense.

(Source: St. Louis Federal Reserve13)

The graph above depicts how the government’s defense expenditures is highly correlated with industrial production. In the last few years, defense spending has declined which has caused industrial production to decline. However, with this new budget, industrial production appears to be headed for healthy growth in the next several years. COMPETITIVE ENVIRONMENT Commercial Aircraft Boeing faces high competition in both the Commercial Aircraft and Defense industry segments. The Commercial Aircraft segment is dominated by leaders Boeing and Airbus, but also includes smaller, regional companies such as Embraer, Bombardier, Irkut, Comac, and Mitsubishi Aircraft. While there are several key players, Boeing and Airbus have a duopoly on the market, as those two companies control a majority of the market share. Boeing and Airbus have been competing with each other for a while and Boeing seems to have taken the lead over the past few years, in terms of orders, deliveries, and revenues. In fact, Boeing dominated the first half of 2018. Boeing led the way with 460 total orders, while Airbus had only 2064. 206 airplanes is still a lot, but roughly 69% of new orders went Boeing’s way compared to 31% for Airbus. This resulted in commercial revenues of $45,009 billion for Boeing in 1H 2018, and $16,674 billion for Airbus4. Airbus is most known for their single aisle airplanes and their 320 model is a direct competitor of Boeing’s 737. Even so, Boeing still had more orders for their 737 than Airbus’ 320 in the first half of 2018. While Airbus remains Boeing’s top competitor, it would seem that Boeing has taken one step ahead of their competition. Something else to consider is that commercial aircraft production is quite sensitive to economic conditions. Following each recession, Boeing and Airbus saw a significant production dip. As air travel demand falls, orders are canceled or deferred, backlogs fall, and production decreases. This is both a negative and positive for the industry. As of right now, the economy is booming which has resulted in increased air traffic demand which has led Boeing and Airbus to reach record levels of production.

Other factors that drive commercial aircraft demand include stronger demand from emerging global markets and airlines replacing their aging and less-fuel efficient fleets. Emerging markets have seen increased flight demand from Asia, the Middle East, Eastern Europe, Latin America, China, and India. This has caused aircraft makers to become bullish, raising their long-term production projections. Airlines also need to replace their aging fleets to shift towards more efficient models. Defense, Space & Security Boeing is also a leader in the defense segment along with Lockheed Martin. Unlike the commercial aircraft segment, there are more than two competitors who represent a larger portion of the market. Northrop Grumman, BAE Systems, General Dynamics, Raytheon, and SpaceX all represent substantial parts of the Defense and space segment. However, almost all of these companies solely operate in the defense segment while Boeing places a stronger focus on the commercial airplane segment. With that being said, Boeing faces more opposition in the Defense segment due to more competitors. Boeing, Lockheed Martin and others are constantly trying to win bids on long-term contracts with various government and military agencies. As a result, government and military contracts make up a large portion of the revenues of Boeing’s Defense, Space & Security segment as well as all of Boeing’s competitors. For Boeing and Lockheed to remain market leaders, and for other companies to earn a larger market share, it is imperative to win as many large bids as possible. PORTER’S FIVE FORCES ANALYSIS Threat of New Entrants: Low The barriers to entry of the industry make it highly unlikely, if not impossible, for new firms to enter the market. The largest barriers to entry are the high capital costs and industrial capacity that is required to manage and maintain the manufacturing and distribution of large aircraft. While some companies can still enter the market, these barriers make it nearly impossible for any new firm to reach the size and capacity of Boeing and Airbus. Threat of Substitutes: Low There is currently no substitute for the primary products of this industry: airplanes. Airplanes are a highly sophisticated, and specialized product, and there are no means of substitute now or in the foreseeable future. Air travel is a preferable form of travel for a reason. There is no other form of transportation that can travel as fast and safely. Bargaining Power of Customers: Moderate The main customers for airline manufactures are the major commercial airlines, which includes: Delta, United, and American. The majority of aircraft fleets are purchased with long-term contracts, which lock up airlines into a multi-year commitment of purchasing aircraft from a given company, seriously reducing their bargaining power. However, because airlines are buying planes in bulk, they are able to search

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around for who can offer the best value and price. Because of the high cost of an airplane, airlines are fairly price sensitive. This increases both consumer bargaining power and the competition among companies such as Boeing and Airbus. Luckily, for Boeing and Airbus, they are the sole providers of large commercial aircraft. Bargaining Power of Suppliers: Moderate Similar to how Boeing locks their customers into long-term contracts, they do the same with their suppliers. They lock into multi-year contracts with companies such as General Electric, Rolls-Royce, and United Technologies for their parts and supplies. By signing a multi-year deal, Boeing locks in a certain price point which reduces the risk of spikes in supply prices. However, because there are fewer players in the large aircraft manufacturing industry, suppliers of large parts and supplies are able to mold the costs due to having a smaller market. On the other hand, airplane parts are highly specialized and there are only a few companies who make certain parts. Therefore these companies can only sell to certain companies like Boeing or Airbus, which reduces their bargaining power. Competitive Rivalry: High Despite only having a few competitors, the Aerospace & Defense industry is highly competitive. In the commercial segment, Boeing is constantly battling their top competitor Airbus for contracts. There are a few more adversaries in the Defense segment which includes: Lockheed Martin, Northrop Grumman, BAE Systems, and Raytheon. These companies make up a majority of the market share of the industry. All of these companies offer similar products to Boeing and cause a rivalry in terms of competing for contracts. CATALYSTS FOR GROWTH Increased Demand in Air Travel One of the larger growth catalysts for the industry is increased air travel. More people than ever are traveling via air and consequently airlines are purchasing more planes to meet this increased demand. In 2017, worldwide air passenger riders exceeded 4 billion for the first time ever, a 7.3% increase in passengers in 201629.

(Source: International Air Transport Association1)

The graph above shows how some analysts predict that the number of annual air travel passengers will grow exponentially, even after already hitting an all-time high. The International Air Transport Association (IATA) expects on average a 3.6% compound annual growth rate (CAGR) due to a growing demand for global connectivity1. Based on their lower and higher end estimates, they expect 2036 annual air passengers to reach between six and twelve million, on average about 7.8 billion, which is almost twice the amount as the 2017 figure. Boeing’s management also expects that there is substantial air travel growth in store. Boeing predicts that new airplane demand will top 42,000 deliveries by 20378. Commercial aviation trends also continue to bode new aircraft demand. Intra-regional routes continue to dominate, and single-aisle aircraft are demanded in order to increase route potentials. Single-aisle aircraft demand is expected to be the largest market force over the next 20 years. Many other existing routes have revised the size of aircraft used in order to increase efficiency and cost effectiveness. A recent trend also shows that smaller aircraft are now being used for long-haul routes due to increased efficiency of modern aircrafts. Also, low-cost and ultra-low-cost carriers continue to gain market share, ultimately increasing demand in commercial aircraft. Growth opportunity exists to those companies who can gain competitive positions by adapting strategy towards new trends. United States Defense Spending As stated above, the new budget proposal for U.S. military and defense spending is another key area for potential growth. The Department of Defense (DoD) set the 2018 budget at a cap of $700 billion and the 2019 cap at $716 billion31. 2018’s budget is a healthy $54 billion raise from 2017’s budget. This is great news for Boeing as the DoD is Boeing’s largest client in the Defense and Space sector, making up about 79% of their 2017 segment revenue. As the United States military expenditures increase, it is highly likely that Boeing’s revenues increase proportionately. Also, geopolitical tension around the world continues to increase. Many countries are focused on building their military in response. This presents growth opportunities for Defense companies to export advanced military equipment to foreign governments and captivate new markets. Increased Demand for Services As worldwide fleets continue to expand, demand for services intend to extend the lives of existing aircraft by improving efficiency. The service market provides many opportunities to provide a variety of solutions to operate fleets effectively. Also, if companies don’t purchase new aircraft to replace aging fleets, they will be required to invest in services to maintain existing fleets. This presents a major growth opportunity for the newly formed Boeing Global Services. Management has already declared they hope to significantly raise segment revenues to $50B annually in the services segment27.

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World Air Cargo Outlook In 2017, air cargo finally recovered after years of decline, promoting optimism for future growth. The world economy has improved, and E-Commerce and consumer spending habits increase the demand for air cargo. Consequently, the demand for wide-body freighters will increase, as well as services related to these aircraft. Due to the increased demand and aging fleets, Boeing predicts 2,650 freighter deliveries in the next 20 years to satisfy the expected growth requirements8. Over the next few decades, increased sales of wide-body airplanes will present a major growth opportunity for the Commercial Airplane segment. Research & Development Even though fuel prices have remained steady as of late, a slight improvement in fuel efficiency can have a major impact on an airlines bottom-line. That is why companies like Boeing, are constantly seeking new ways to save on fuel, whether through their manufacturing processes, or creating innovative, fuel-efficient products. In the Defense and Space sector, companies are constantly trying to find the next big thing that will advance space exploration or military defense systems. EXECUTIVE SUMMARY The Boeing Company, founded in 1916 and headquartered in Chicago, IL, is a leader in both the Aerospace and Defense sectors. With thousands of aircraft currently in service, Boeing is leading the charge of replacing and replenishing commercial airlines’ supply of aircraft. Apart from airplanes, Boeing also specializes in producing items such as satellites and defense systems. Boeing is a global company with customers located in over 150 countries. Boeing operates through four main business segments: Commercial Airplanes, Defense, Space & Security, Global Services, and Boeing Capital. BUSINESS SEGMENTS

(Source: Boeing 10-K8)

Commercial Airplanes (BCA) Commercial Airplanes is Boeing’s main focus and primary source of revenue. This segment primarily provides commercial aircrafts for passenger and cargo purposes. They have been a leader in the manufacturing of commercial aircraft for decades. They have over 10,000 jets currently in service around the world, almost half of the world’s total fleet. They also manufacture freighter jets and are one of the primary producers of wide-body aircraft. About 90% of the world’s cargo is carried onboard Boeing aircraft8. The main products in this segment are commercial aircraft. The company has five families of jets: 737, 747, 767, 777, and 787. Each family has a number of different aircraft models. Below is a table that outlines the average price per aircraft in each family.

Model Family

Number of Planes in Family

Average Price per Plane (Millions)

737 8 planes $110.46

747 2 planes $403.25

767 3 planes $211.00

777 6 planes $358.43

787 2 planes $282.13

Total 21 planes $273.06

(Source: Boeing8)

Defense, Space & Security (BDS) BDS is a bit more of a diverse business segment, as it contains military products as well as space exploration products. While aircraft is still a part of the BDS segment, a larger portion is focused on other products such as commercial derivatives, military rotorcraft, satellites, human space exploration and autonomous systems. Other forms of air travel are also produced in the BDS segment, including helicopters and spacecraft. Another key component of BDS is that this is where the majority of Boeing’s research & development expenditures are concentrated. Boeing is constantly finding innovative ways and methods for space exploration as well as satellite and intelligence systems. Global Services (BGS) Not only is Boeing a leading provider of large commercial and defense aircraft and systems, but they are a leader in providing aftermarket support. They even offer support and services to customers with Non-Boeing products. Boeing Global Services “delivers innovative, comprehensive, and cost-competitive service solutions for commercial, defense, and space customers, regardless of the equipment’s original manufacturer.” Boeing prides themselves on keeping their customer’s commercial aircraft operating at full efficiency at all times.

61.18%22.71%

15.79%0.33%

2017 Revenue by Segment

Commercial Airlines Defense, Space & Security

Global Services Boeing Capital

Company Analysis

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Boeing Capital Corporation (BCC) Boeing is a very unique company due to the extensive customer support. Boeing Capital provides financial solutions for their customer base. Boeing combines their financial strength with their global reach to ensure all of their customers have the best financial support available to them. Boeing Capital is essentially a support service for their three other business segments to ensure customers have access to financing in order to accept delivery of Boeing products. FINANCIAL SUMMARY8 Boeing has had a strong 2018 thus far, and they expect to keep growing. In both of their Q2 and Q3 earnings calls, they increased their initial 2018 total projections for revenue and EPS. At the start of the year, Boeing’s management forecasted total 2018 revenue to end up between $96 and $98 billion but their Q3 earnings call increased their projections to between $98 and $100 billion in total revenue. A key reason for the bump in predicted earnings is that first half of 2018 revenue exceeded first half of 2017. Their forecasted Core EPS has also been increased from an estimated $13.80 - $14.00 to $14.90 - $15.10. Essentially, the previous three earnings releases all portray the same ideas: Boeing continues to generate higher revenues, earnings, and operating cash flow. This is due to strong company-wide execution and winning several substantial bids. Boeing is also reporting strong cash flow, which is highlighted by a share repurchase program in which they have already bought back roughly $8.5 billion shares. Boeing has placed much focus on their cash flow, as well as their debt balances. According to management, Boeing continues to operate with strong liquidity and manageable debt levels. It is fairly evident that Boeing has greatly benefited from strong economic conditions and increased government spending. Boeing has been one of the strongest companies over the last five plus years, and they have doubled their stock price within the last two years, and management expects even more growth to occur. PRODUCTION AND DISTRIBUTION One of the largest factors Boeing must consider when manufacturing and distributing their products is quality. Airplanes require thousands to millions of highly specialized parts and supplies that Boeing cannot produce themselves. That’s why Boeing relies on hundreds of different suppliers who specialize in specific parts, such as engines, metals such as aluminum and titanium, and energy sources such as electricity and oil. Some of Boeing’s largest suppliers include Rolls Royce and General Electric, for engines, and United Technologies for major aircraft parts. Other suppliers include Spirt AeroSystems, Precision Castparts, Triumph Group, Pratt & Whitney, Honeywell, and Rockwell Collins26. Once Boeing has all of their supplies in inventory, they begin their own production processes.

The majority of Boeing’s production comes from the manufacturing of their commercial aircraft. The following chart shows the production rates of Boeing’s different models.

Airplane Family

Production Rate - 2018

Production Rate - 2020

Current Backlog

737 52/month 57/month 4,667

747 0.5/month 0.5/month 23

767 2.5/month 3/month 109

777 5/month 5/month 96

777X In Progress In Progress 326

787 12/month 14/month 655

TOTAL 72/month 79.5/month 5876

(Source: Boeing8)

In 2017, Boeing set the industry record for most aircraft deliveries in a single year with 792. They also added 912 orders in 2017 which has increased their backlog over 5,800 planes. Boeing expects deliveries to increase in the future due to increased production rates. Boeing believes they can become even more efficient in the future because as aircraft programs move later in the life cycle, the process becomes more efficient. Boeing feels that in 2019 and 2020 they can significantly improve their efficiency and have the capacity to produce almost 80 planes per month by 2020, up from 72 planes in 2018.

(Source: Deloitte14)

According to Deloitte’s 2018 Global aerospace and defense industry outlook, the expected total commercial aircraft deliveries are expected to continue to grow after hitting an all-time high in 2017. The graph also displays that Boeing actually accounted for slightly more than half of total commercial airplane deliveries in 2017, further demonstrating Boeing’s dominance in the industry. MAJOR CUSTOMERS Part of what makes Boeing a unique company is their global reach. Boeing provides airplanes for almost every airline in the world, with customers in over 150 countries. Historically, over half of Boeing’s total revenues are from international customers. Boeing does business with almost all of the major commercial airlines including American, Delta, United, and Southwest. Their customers with the largest standing

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backorders include: Ryanair Holdings, United Airlines, Southwest Airlines, Turkish Airlines, American Airlines, GE Capital Aviation Services, Alaska Air Group, Delta Air Lines, and Qatar Airways. FedEx and UPS are also major customers of Boeing and primarily use Boeing aircraft to transport their cargo around the world. Boeing also provides products and services for military and spaces organizations. As mentioned above, Boeing’s largest customer in the Defense, Space & Security segment is the United States Department of Defense, which on average, has accounted for roughly 30% of Boeing’s total revenues. NASA is another major customer of Boeing, specializing in space exploration and transportation. RESEARCH AND DEVELOPMENT Boeing places strong value on innovation and their experts are constantly looking for ways to make planes and products more fuel-efficient and environmentally friendly among other things. Boeing has developed two new planes that do just that. The 737 MAX is “redefining the future of efficient and environmentally friendly air travel8,” and it became Boeing’s fasted selling product ever. The 777X, which has been Boeing’s largest product launch in commercial airplane history, is known for its innovative engines and composite wings to reduce wind resistance and fuel consumption. Historically, Boeing has spent about $3 billion annually in R&D. Even though they are constantly working on improving their aircraft, a large portion of their R&D comes from space transportation and exploration. One of their larger ongoing projects is the Starliner, a high-tech space capsule that will act as a ferry to take astronauts to and from the International Space Station. Boeing hopes that the Starliner can also streamline the future of the creation of commercial spaceflight15. MANAGEMENT Boeing is one of the largest companies in the world, and requires a competent management team to lead such an operation. There are more than 140,000 total employees spread over Boeing’s major business segments and locations across the world. There is a 13 member Executive Council in place that acts as the board of directors for the company. At the helm of the entire operation is Mr. Dennis A. Muilenburg, who currently acts as Chairman, President, and CEO of the Boeing Company. Muilenburg is 54 years of age and has been with the company since the age of 21 (33 years). He was named President in December 2013, CEO in July 2015, and Chairman of the board in March 2016. Previously he has held the offices of COO of the Boeing Company, CEO of Boeing Defense, Space and Security, and President of Boeing Global Services & Support. Muilenburg also has ties to Iowa as he is a native of Orange City, Iowa and attended Iowa State University.

With Muilenburg in charge, Boeing has seen substantial earnings growth. The company has also worked a lot to improve efficiency and operating margins over the last several years. Having led two of Boeings three largest business segments, Muilenburg is a prime candidate to continue leading Boeing toward more success based on his extensive background with the company and industry. VALUATION SUMMARY We arrived at a HOLD rating for The Boeing Company after analyzing a variety of valuation techniques to arrive at a target price of $382. We utilized the Discounted Cash Flow Model (DCF), Economic Profit Model (EP), Dividend Discount Model (DDM), and Valuation using Financial Multiples of comparable firms to derive the target price. Each model provides alternative perspectives and credibility to valuation analysis based on input assumptions applied. We believe that the Discounted Cash Flow and Economic Profit Models compute the target price most accurately because of our ability to implement additional assumptions based off of management’s guidance for a more precise target price. KEY ASSUMPTIONS Forecasting Revenues Commercial Airplanes: The Boeing Company uses Program Accounting to account for the Commercial Airplane segment, where profitability is recognized over multiple contracts and years. Revenue is recognized for commercial airplane deliveries when each unit is complete and accepted by the customer. Changes in estimated revenue are recognized prospectively. Cost of Sales in regard to program accounting will be discussed in the following section. In order to forecast Commercial Airplane segment revenue, we formed a relationship between historic delivery quantities of each family of airplane models, average selling price per family, and the amount of segment revenue reported each year. On average, Boeing reports 43% of revenue realized based on delivery quantity of each model, multiplied by average selling price per family. In order to forecast the revenue reported for the forecast period, we first forecasted the annual production rate of each model to be delivered based off of management’s guidance. Next, the hypothetical amount of annual deliveries in each family was multiplied by the average plane price per family to arrive at total revenue realized. This amount was then adjusted by multiplying by the average percent of revenue reported. Forecasted revenue growth in the Commercial Airplane segment is driven by increased capacity utilization and an alternative product mix in the period. This trend aligns with our industry outlook for increased global fleet growth, especially in single-aisle and cargo airplanes. Growth in Commercial Airplane revenue becomes constant in 2021 due to capacity restrictions.

Valuation Analysis

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Defense, Space & Security: Growth within the Defense, Space and Security sub-sector is expected to be driven by the current US administration’s emphasis on strengthening our nation’s military. Furthermore, increased geopolitical tension across many regions of the world has resulted in increased international demand for advanced military products. According to Deloitte’s Defense Sub-Sector Outlook, revenues are expected to grow 3.2% as US Defense budgets increase and return to growth after multiple years of decline. We forecasted that year-over-year segment revenue would increase 0.5% annually thereafter. In order to achieve forecasted revenue growth assumptions, it is imperative that Boeing continues to win US Defense contracts as well as growth opportunities via foreign military sales. Global Services: In July of 2017, The Boeing Company formed the Boeing Global Services segment to expand their position in the aerospace services market. As worldwide airline fleets continue to grow and age, the demand for services is also increasing. Boeing continues to expand their capabilities within each market segment through increased innovation and strategic acquisitions to capitalize on shifting demand trends. Boeing predicts that by 2037 the potential market value for new aerospace services will grow by $8.8B. Management has expressed that they plan to increase Global Service revenues to $50B in the next 10 years. Based on management’s expectations of revenue targets, we grew our initial revenue forecast by 12% and increased the growth rate by 0.5% thereafter. We believe this is accurate due to the 5-year revenue forecast equaling roughly 50% of the 10-year target. Boeing Capital: Boeing Capital Corporation offers lending and leasing to Boeing’s business units to ensure that customers have financing necessary to buy and take delivery of their products. Services provided primarily support the Commercial Airplane segment, therefore we forecasted revenue growth based on the relative growth rates of total commercial segment revenue year-over-year. Forecasting Cost of Sales The Boeing Company uses Program Accounting to account for Cost of Sales in the Commercial Airplane Segment. Under program accounting, inventoriable production costs are accumulated and charged to Cost of Sales by program, rather than individual units. To establish the relationship of Revenue to Cost of Sales, estimates are required for the number of units produced and sold, as well as the reasonable period. The Cost of Sales percentage is then applied to the amount of Revenue recognized. Service revenue is recognized when the service is performed with the exception of US Government Contracts. In order to forecast Cost of Sales, we derived a relationship of both product and service costs to their respective amount of revenue in the most recent year prior to forecast period. As the lifetime of the program increases, margins become more favorable due to increased efficiency of producing products. Therefore, we increase the initial year margin for both products and services by 0.5% annually. To calculate the Cost of Sales in each forecast period, we multiplied respective revenues by the calculated

ratio each year. The model illustrates our operating margin improving from 11.01% to 15.08% by the end of the forecast period. We believe this is obtainable due to the increase of less capital intensive service revenues. Long-Term Debt Long-Term Debt is forecasted based on the relative percentage of non-cash assets. Historically, long-term debt has equaled roughly 14% of non-cash assets. When forecasting long-term debt, we hold this relationship constant throughout the forecast period. Boeing’s strong cash flows and liquidity, with manageable debt levels, lead us to believe that capital structure will remain reasonably consistent throughout the forecast period. Shares Outstanding In December of 2017, management announced the authorization of an $18B share-buyback program. They estimated that it would be complete in the following 24-30 months. During the nine months ended September 30, 2018, they had already repurchased roughly $8B worth of shares through an open market program. We forecast they will continue to aggressively repurchased shares under the current program until 2019. We then prorated the remaining program balance amongst the following years in the forecast period ($500M per year). WEIGHTED-AVERAGE COST OF CAPITAL Cost of Debt The Pre-Tax Cost of Debt was calculated by using the last fiscal year-end Interest Expense, divided by the average outstanding total debt from the current and prior year. We estimate the Pre-Tax Cost of Debt to be roughly 3.52% using this method. The Pre-Tax Cost of Debt was then multiplied by the Marginal Tax Rate (21%) to arrive at an After-Tax Cost of Debt rate equal to 2.78%. Cost of Equity The Cost of Equity was calculated using the Capital Asset Pricing Model (CAPM). The CAPM model requires that we make assumptions for the risk-free rate, Raw BETA, and the Equity Risk Premium relative to Boeing. We chose to use the 10-Year Treasury-Note for our risk-free rate (3.189%) and a Raw Beta from historical data using Bloomberg (1.12). The Equity Risk Premium was calculated by taking an average from historic S&P 500 returns as well information provided by Damodaran (5.00%). Using these assumptions, we calculated a Cost of Equity equal to 8.79%. Weighted-Average Cost of Capital (WACC) In order to calculate the market value of debt; the Long-Term, Current Portion & Short-Term Debt, and Present Value of Operating Leases were summed together. The market value of equity was estimated by multiplying the current market price per share by the number of shares currently outstanding.

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The Boeing Company’s capital structure under these assumptions is 94.68% Equity and 5.32% Debt. The overall weighted-average cost of capital is equal to 8.47%. VALUATION MODELS Discounted Cash Flow (DCF) / Economic Profit (EP) We believe that the Discounted Cash Flow (DCF) and Economic Profit (EP) models best reflect the intrinsic value of where we value Boeing’s stock. The DCF model is built upon forecasting the free cash flows of the firm and discounting them by the WACC. Free cash flows are derived from taking NOPLAT subtracted by change in Invested Capital. The EP model is very similar, except it is constructed by calculating free cash flows through determining the Economic Profit of each year. Economic Profit is calculated by taking NOPLAT minus the change in invested capital multiplied by the WACC. Based upon prior forecasts, we calculated our CV year (2022) NOPLAT to reach $14,736 million and our Economic Profit to reach $12,873 million. We then calculated our adjusted intrinsic stock price to be $382.00. As of November 9th Boeing’s stock price closed at $369.35. Based upon our intrinsic price of $382, we can expect to earn a 3.43% profit if we continue to HOLD Boeing in our portfolio, which is what we recommend doing. Dividend Discount Model (DDM) Although we prefer the results of our DCF and EP models, we feel that our Dividend Discount Model (DDM) is also a good representation of where we value Boeing. The DDM model is constructed by discounting our future dividends per share by our estimated cost of equity. We forecasted our dividends per share by multiplying our EPS estimates by a dividend payout ratio of 46.68%. We derived this payout percentage based on the historical 5-year average of payout ratios. We calculated our adjusted intrinsic stock price to be $386.64, which is just slightly higher than our DCF and EP methods. This further promotes us to believe that Boeing would be a good hold position in our portfolio as we continue to expect small returns over the next several years. Relative Valuation Relative valuation is often considered another reliable way of valuing a company by analyzing how they compare to their competitors. However, we feel that relative valuation does not provide the best estimate of Boeing’s stock price, and we would prefer to act based upon our DCF, EP, and DDM models. Our relative valuation model consists of looking at eight of Boeing’s competitors and their corresponding stock prices and EPS estimates. First, we computed that Boeing’s competitors had an average 2018 P/E Ratio of 18.99 and 2019 Ratio of 16.40. These numbers are considerably lower than Boeing’s expected 2018 and 2019 ratios, at 25.1 and 20.9 respectively. This results in an estimated stock price of $279.76 in 2018, significantly lower than the intrinsic stock price of our other models. A key factor in leading us to believe that this model is not the most accurate representation of our valuation is that almost all of Boeing’s competitors

specialize in either commercial aircraft or defense and space, while Boeing is a market leader in both segments. While the companies selected are the most similar companies to Boeing, Boeing is most likely too diverse of a company to value based solely off of their competition. SENSITIVITY ANALYSIS Beta vs Equity Risk Premium This relationship shows that Boeing is strongly affected by the market’s movements. As the market becomes less risky, a decreasing equity risk premium could drastically increase Boeing’s stock price, and vice versa. We set the equity risk premium at 5.00%, which is a blend of historical and anticipated data. Historically, the ERP revolves around an average of 4.80%, but recent months have seen increased volatility which have resulted in an ERP north of 5.20%. A .15% increase in the ERP would result in roughly a $13 decrease in stock price, while a .15% decrease in ERP would result in a $13 increase in stock price. Also, as Boeing reaches a steady state, we can expect their Beta to decrease which will also result in a healthy increase to their stock price. A 0.20 point decrease in their Beta would result in close to a $100 increase in stock price. While that would be quite a decrease in Boeing’s Beta, it is a possibility. All in all, it is clear that Boeing is moving very closely with the market, and as Boeing reaches a steady growth, we should expect Boeing’s stock price to grow. Beta vs Risk Free Rate Boeing is also fairly sensitive to the risk-free rate. The comparison of beta and the risk-free rate is very similar to that of beta and the ERP. What this shows is that Boeing is sensitive to both the equity markets (ERP) and the bond markets (RF). If the bond markets become more volatile and the risk-free rate increases, then Boeing will lose value. A .20% increase in the risk-free rate will result in about a $14 drop in stock price. However, if the bond markets become less risky and the Treasury note heads toward a percentage closer to 3%, Boeing will see a similar $15 increase in stock price. Beta’s effects remain similar in that as Boeing approaches steady-state growth, their Beta will decrease, which could greatly increase the stock price. CV Growth of NOPLAT vs WACC By comparing CV growth and the WACC, we can tell that that Boeing is highly sensitive to changes in both. We assumed that our CV growth of NOPLAT would be the equivalent to our estimated long-term GDP growth, 3.25%. Even though historically Boeing is strongly correlated with the economy, it is possible for Boeing’s growth to exceed or fall behind the economy’s growth. If this occurs and Boeing grows even higher, the stock price will as well. A 0.50% increase in CV growth would increase the stock price by roughly $33 while a similar decrease in growth would decrease the stock price. The WACC on the other hand has an inverse relationship. When the WACC increases about 0.30%, our stock price will decrease about $20.

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CV Growth of NOPLAT vs CV ROIC This analysis shows that both the CV growth rate and CV ROIC have a positive effect on the share price of Boeing. We currently have Boeing operating with a 66.97% ROIC in our CV year, 2022. That is definitely a realistic target for Boeing but remains much higher than Boeing’s historic levels. IF ROIC were too decrease about 10%, then Boeing’s stock would drop about $5. Again, if Boeing grows as we expect real GDP to grow, then we can expect Boeing’s stock to remain close to its current value. If GDP grows more than expected then Boeing will benefit greatly. Essentially, CV growth of NOPLAT remains highly sensitive to Boeing’s value, while CV ROIC has a slighter effect. Risk Free Rate vs CV ROIC The relationship between risk-free rate and CV ROIC shows that both variables have a moderate effect on stock price. As mentioned above, Boeing reacts strongly to the bond market (risk-free rate) and when the market becomes less volatile, Boeing’s value jumps and vice versa. However, if the risk-free rate decreases, there is a good chance that Boeing’s CV ROIC will decrease as well and this adversely impacts the stock price. For every 0.20% increase in the risk-free rate, the stock will decrease by about $14. A 10% decrease in ROIC would only drop the stock by about $4. However when combining these two conditions, the stock could drop almost $20. Pre-Tax Cost of Debt vs Marginal Tax Rate The relationship between pre-tax cost of debt and the marginal tax rate rates have little effect on Boeing as the company appears to be not very sensitive to these variables. Tax rates are something that business keep an eye as they could have a substantial effect on the business. That does not appear to be the case however, as a 5.00% increase in tax rate would only decrease the stock price by less than $1. Similarly, as the firm decreases their cost of debt about 0.20%, the stock price will only increase about $0.40.

Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) 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.

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17. Larsen, Ken (2018, August 25). What is in the $717 Billion Military Spending Bill? Retrieved from https://medium.com/@Smalltofeds/what-is-in-the-717-billion-military-spending-bill-signed-into-law-on-august-14-2018-d1f83282df3

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The Boeing Company

Key Assumptions of Valuation Model

Ticker Symbol BA

Current Share Price $369.35

Current Model Date 11/9/2018

FY End (Month/Day) Dec. 31

Pre‐Tax Cost of Debt 3.52%

Beta 1.12

Risk‐Free Rate 3.189%

Equity Risk Premium 5.00%

CV Growth of NOPLAT 3.25%

CV Growth of EPS 3.25%

Current Dividend Yield 2.00%

Marginal Tax Rate 21.00%

Effective Tax Rate 18.40%

Normal Cash (Industry Standard) 2.00%

WACC 8.47%

CV ROIC 66.97%

Divident Payout Ratio 46.68%

Cost of Equity 8.79%

5Y Target Price 382.00$                 

Current Stock Price  $369.35

Upside to TP 3.43%

RATING HOLD

RATING

The Boeing Company

Revenue Decomposition

Fiscal Years Ending Dec. 31 (Millions) 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

REVENUE SEGMENTS

COMMERCIAL AIRPLANES (BCA):

737

Average Price   $          110.5 

Production Rate (per Month) 52 57 57 57 57

Deliveries                  496                   490                   529  624 684 684 684 684

Total  737 Revenue (Realized)  68,929            75,556              75,556            75,556             75,556               

Total 737 Revenue (Recognized) 29,687           32,542             32,542           32,542            32,542               

747

Average Price   $          403.3 

Production Rate (per Month) 0.5 0.5 0.5 0.5 0.5

Deliveries                    18                       9                     14  6 6 6 6 6

Total  747 Revenue (Realized)  2,420              2,420                2,420              2,420               2,420                 

Total 747 Revenue (Recognized) 1,042              1,042                1,042              1,042               1,042                 

767

Average Price   $          211.0 

Production Rate (per Month) 2.5 2.5 3 3 3

Deliveries                    16                     13                     10  30 30 36 36 36

Total  737 Revenue (Realized)  6,330              6,330                7,596              7,596               7,596                 

Total 737 Revenue (Recognized) 2,726              2,726                3,272              3,272               3,272                 

777

Average Price   $          358.4 

Production Rate (per Month) 5 5 5 5 5

Deliveries                    98                     99                     74  60 60 60 60 60

Total  737 Revenue (Realized)  21,506            21,506              21,506            21,506             21,506               

Total 737 Revenue (Recognized) 9,263              9,263                9,263              9,263               9,263                 

787

Average Price   $          282.1 

Production Rate (per Month) 12 14 14 14 14

Deliveries                  135                   137                   136  144 168 168 168 168

Total  737 Revenue (Realized)  40,627            47,398              47,398            47,398             47,398               

Total 737 Revenue (Recognized) 17,498           20,414             20,414           20,414            20,414               

TOTAL COMMERCIAL REVENUE:

Deliveries                  763                   748                   763  864 948 954 954 954

Segment Revenue            59,399             58,012             56,729  60,216           65,987             66,533           66,533            66,533               

DEFENSE, SPACE & SECURITY (BDS):

Segment Growth Rate 3.20% 3.70% 4.20% 4.70% 5.20%

Segment Revenue 23,708           22,563           21,057           22,658           23,496             24,483           25,634            26,967               

GLOBAL SERVICES (BGS):

Segment Growth Rate 12.00% 12.50% 13.00% 13.50% 14.00%

Segment Revenue            13,293             13,925             14,639  16,216           18,243             20,615           23,398            26,673               

BOEING CAPITAL (BCC): 

Segment Revenue                  413                   298                   307  326                 357                   360                 360                  360                    

Unallocated Items, Eliminations, Other:

Segment Revenue (699)                (227)                660                 ‐                  ‐                    ‐                  ‐                   ‐                     

TOTAL REVENUES 96,114           94,571           93,392           99,416           108,084           111,990         115,924          120,533            

The Boeing Company

Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

Revenues:

Commercial Airplanes 59,399 58,012 56,729              60,216              65,987              66,533               66,533               66,533 

Defense, Space & Security 23,708 22,563 21,057              22,658              23,496              24,483               25,634               26,967 

Global Services 13,293 13,925 14,639              16,216              18,243              20,615               23,398               26,673 

Boeing Capital 413 298 307                   326                   357                   360                    360                    360 

Unallocated Items, Eliminations & Other (699) (227) 660                      ‐                        ‐                        ‐                         ‐                         ‐   

Total Revenues 96,114 94,571 93,392              99,416            108,084            111,990             115,924             120,533 

Cost of Products (73,446) (72,713) (68,365)            (72,837)           (78,198)           (79,082)            (79,621)            (80,305)

Cost of Services (8,578) (8,018) (7,631) (8,446)               (9,404)             (10,499)           (11,774)            (13,262)           

Boeing Capital Interest Expense (64) (59) (70) (67)                    (67)                   (67)                   (67)                    (67)                   

Total Costs and Expenses (82,088) (80,790) (76,066) (81,350)            (87,669)           (89,649)           (91,462)            (93,634)           

Gross Profit 14,026 13,781 17,326 18,066             20,415            22,342            24,462             26,899            

Gross Profit Margin 14.59% 14.57% 18.55% 18.17% 18.89% 19.95% 21.10% 22.32%

Income from Operating Investments, net 274 303 204 230                   239                   249                   260                   274                  

General and Administrative Expense (3,525) (3,616) (4,094) (4,094)               (4,451)             (4,612)             (4,774)               (4,964)              Research and Development Expense, net (3,331) (4,627) (3,179) (3,512)               (3,803)             (3,885)             (3,956)               (4,037)              

Gain/(Loss) on Dispositions, net (1) (7) 21 ‐                    ‐                   ‐                   ‐                    ‐                   

Earnings from Operations 7,443 5,834 10,278 10,690             12,399            14,093            15,993             18,171            

Operating Margin 7.74% 6.17% 11.01% 10.75% 11.47% 12.58% 13.80% 15.08%

Other Income/(Loss), net (13) 40 129 ‐                    ‐                   ‐                   ‐                    ‐                   Interest and Debt Expense (275) (306) (360) (391)                  (414)                 (411)                 (403)                  (402)                 Earnings Before Income Taxes 7,155 5,568 10,047 10,299             11,985            13,682            15,590             17,769            Income Tax Expense (1,979) (673) (1,850) (1,895)               (2,205)             (2,518)             (2,869)               (3,270)              

Net Earnings from Continuing Operations 5,176 4,895 8,197 8,404                9,780               11,165            12,721             14,500            

Net Loss on Disposal of Discontinued Operations - - - - - - - -

Net Earnings 5,176 4,895 8,197 8,404                9,780               11,165            12,721             14,500            

Basic Earnings per Share 7.52$ 7.70$ 13.60$ 14.73                17.65               20.15               22.95                26.15               # Shares Outstanding 667 617 591 570                   554                   554                   554                   554                  

Dividends per Share 3.82$ 4.69$ 5.97$ 6.88                  8.24                 9.41                 10.72                12.21               

The Boeing Company

Balance Sheet

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)Assets:Cash and Cash Equivalents 11,302$ 8,801$ 8,813$ $ 5,351 $ 2,435 $ 6,854 $ 12,490 $ 20,055 Short-Term and Other Investments 750 1,228 1,179 1,217 1,255 1,295 1,337 1,379 Accounts Receivable, net 8,713 8,832 10,516 11,194 12,170 12,610 13,053 13,572 Current Portion of Customer Financing, net 212 428 309 514 385 390 317 295Inventories, net of Advances and Progress Billings 47,257 43,199 44,344 44,542 48,094 48,918 49,536 50,253 Deferred Income Taxes - - - - - - - - Total Current Assets 68,234 62,488 65,161 62,818 64,340 70,067 76,733 85,554

Customer Financing, net 3,358 3,773 2,740 2,908 3,123 3,149 3,149 3,149 Property, Plant and Equipment, net 12,076 12,807 12,672 13,288 13,828 14,300 14,713 15,074 Goodwill 5,126 5,324 5,559 5,559 5,559 5,559 5,559 5,559 Acquired Intangible Assets, net 2,657 2,540 2,573 2,573 2,573 2,573 2,573 2,573 Deferred Income Taxes 265 332 341 341 341 341 341 341 Investments 1,284 1,317 1,260 1,115 1,156 1,205 1,261 1,327 Other Assets, net of Accumulated Amortization 1,408 1,416 2,027 2,066 2,105 2,145 2,185 2,227 Total Assets 94,408 89,997 92,333 90,668 93,025 99,338 106,514 115,804

Liabilities and Equity:Accounts Payable 10,800 11,190 12,202 13,000 14,037 14,277 14,458 14,667 Accrued Liabilities 14,014 14,691 15,292 15,410 16,754 17,359 17,969 18,683 Advances and Billings in Excess of Related Costs 24,364 23,869 27,440 27,562 29,761 30,270 30,653 31,096 Short-Term Debt and Current Portion of Long-Term Debt 1,234 384 1,335 1,275 1,148 728 554 1,312 Income Taxes Payable - - - - - - - - Total Current Liabilities 50,412 50,134 56,269 57,248 61,699 62,635 63,634 65,759

Deferred Income Taxes 2,392 1,338 1,839 1,839 1,839 1,839 1,839 1,839 Accrued Retiree Health Care 6,616 5,916 5,545 5,332 5,127 4,929 4,740 4,557 Accrued Pension Plan Liability, net 17,783 19,943 16,471 16,471 16,306 16,143 15,982 15,822 Non-Current Income Taxes Payable - - - - - - - - Other Long-Term Liabilities 2,078 2,221 2,015 1,792 1,873 1,888 1,904 1,942 Long-Term Debt 8,730 9,568 9,782 10,487 10,521 10,711 10,860 11,015 Total Liabilities 88,011 89,120 91,921 93,169 97,365 98,145 98,958 100,934

Shareholders' Equity:Common Stock & Additional Paid in Capital 9,895 9,823 11,865 11,946 12,026 12,107 12,187 12,268 Treasury Stock, at cost (29,568) (36,097) (43,454) (51,454) (58,454) (58,954) (59,454) (59,954) Retained Earnings 38,756 40,714 45,320 49,659 54,739 60,692 67,475 75,208 Accumulated Other Comprehensive Loss (12,748) (13,623) (13,376) (12,709) (12,709) (12,709) (12,709) (12,709) Total Shareholders' Equity 6,335 817 355 (2,558) (4,397) 1,136 7,500 14,813 Add: Noncontrolling Interests 62 60 57 57 57 57 57 57 Total Equity 6,397 877 412 (2,501) (4,340) 1,193 7,557 14,870

Total Liabilities and Equity 94,408 89,997 92,333 90,668 93,025 99,338 106,514 115,804

The Boeing Company

Cash Flow Statement ‐ Historical

Fiscal Years Ending Dec. 31 2015 2016 2017

Cash Flows - Operating Activities:Net Earnings 5,176 4,895 8,197

Non-Cash Items: Share-Based Plans Expense 189 190 202 Depreciation and Amortization 1,833 1,910 2,069 Investment/Asset Impairment Charges, net 167 90 113 Customer Financing Valuation Cost/(Benefit) (5) (7) 2 Loss on Disposal of Discontinued Operations - - - (Gain)/Loss on Dispositions, net 1 7 (21) Other Charges and Credits, net 364 369 287 Excess Tax Benefits from Share-Based Payment Arrangements (157) - -

Changes in Assets and Liabilities:Accounts Receivable (1,069) 112 (1,821) Inventories, net of Advances and Progress Billings (1,110) 3,755 (1,085) Accounts Payable (238) 622 130 Accrued Liabilities 2 726 573 Advances and Billings in Excess of Related Costs 1,192 (493) 3,570 Income Taxes Receivable, Payable and Deferred 477 (810) 857 Other Long-Term Liabilities 46 (68) 94 Pension and Other Postretirement Plans 2,470 153 (582) Customer Financing, net 167 (696) 1,017 Other (142) (256) (258)

Net Cash Provided by Operating Activities 9,363 10,499 13,344

Cash Flows - Investing Activities:Property, Plant and Equipment Additions (2,450) (2,613) (1,739) Property, Plant and Equipment Reductions 42 38 92 Acquisitions, net of Cash Acquired (31) (297) (324) Contributions to Investments (2,036) (1,719) (3,601) Proceeds from Investments 2,590 1,209 3,639 Purchase of Distribution Rights - - (131) Other 39 2 2

Net Cash Used by Investing Activities (1,846) (3,380) (2,062)

Cash Flows - Financing Activities:New Borrowings 1,746 1,325 2,077 Debt Repayments (885) (1,359) (953) Payments to Non-Controlling Interest - - - Repayments of Distribution Rights and Other Asset Financing - (24) - Stock Options Exercised 399 321 311 Excess Tax Benefits from Share-Based Payment Arrangements 157 - - Employee Taxes on Certain Share-Based Payment Arrangements (96) (93) (132) Common Shares Repurchased (6,751) (7,001) (9,236) Dividends Paid (2,490) (2,756) (3,417)

Net Cash Used by Financing Activities (7,920) (9,587) (11,350)

Effect of Exchange Rate Changes on Cash and Cash Equivalents (28) (33) 80 Net Decrease in Cash and Cash Equivalents (431) (2,501) 12 Cash and Cash Equivalents at Beginning of Year 11,733 11,302 8,801 Cash and Cash Equivalents at End of Year 11,302 8,801 8,813

The Boeing Company

Cash Flow Statement ‐ Forecast

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022 (CV)

Cash from Operating Activities:

Net Earnings 8,404 9,780 11,165 12,721 14,500

Adjustments to Reconcile Net Earnings to Net Cash Provided by Operating Activities:

Depreciation and Amortization 1,584 1,661 1,728 1,787 1,839 Change in Deferred Taxes - - - - -

Changes in Working Capital Accounts:Change in Accounts Receivable (678) (976) (440) (443) (519) Change in Inventories (198) (3,552) (823) (618) (716) Change in Customer Financing, net (373) (86) (31) 73 22 Change in Accounts Payable 798 1,037 240 181 209 Change in Accured Liabilities 118 1,344 606 610 714 Change in Advances and Billings in Excess of Related Costs 122 2,198 510 383 443 Change in Other Long-Term Liabilities (223) 81 15 16 38 Change in Accrued Retiree Health Care (213) (205) (197) (190) (182) Change in Accrued Pension Plan Liability - (165) (163) (161) (160)

Net Cash Provided by Operating Activities 9,341 11,116 12,609 14,358 16,188

Cash from Investing Activities(Increase)/Decrease in Short-Term Investments (38) (39) (40) (41) (43) (Increase)/Decrease in Long-Term Investments 145 (41) (49) (57) (66) (Increase)/Decrease in Other Assets (39) (39) (40) (41) (42) Capital Expenditures (2,200) (2,200) (2,200) (2,200) (2,200)

Net Cash Used for Investing Activities (2,131) (2,319) (2,329) (2,339) (2,350)

Cash from Financing ActivitiesProceeds from Issuance (Payments) of Long-Term Debt 705 34 190 149 155 Changes in Current Portion of Long-Term Debt (60) (127) (420) (174) 758 Payment of Dividends (4,065) (4,700) (5,212) (5,938) (6,767) Proceeds from Issuance of Common Stock 81 81 81 81 81 Repurchases of Common Stock (8,000) (7,000) (500) (500) (500) Changes in Accumulated Other Comprehensive Income (Loss) 667 - - - - Proceeds from Non-Controlling Interests - - - - -

Net Cash Used by Financing Activities (10,672) (11,713) (5,861) (6,383) (6,273)

Net Increase (Decrease) in Cash (3,462) (2,916) 4,419 5,636 7,565 Cash, Beginning of Year 8,813 5,351 2,435 6,854 12,490 Cash, End of Year 5,351 2,435 6,854 12,490 20,055

The Boeing Company

Common Size Income Statement

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

Total Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of Products -76.42% -76.89% -73.20% -73.26% -72.35% -70.62% -68.68% -66.63%

Cost of Services -8.92% -8.48% -8.17% -8.50% -8.70% -9.38% -10.16% -11.00%

Boeing Capital Interest Expense -0.07% -0.06% -0.07% -0.07% -0.06% -0.06% -0.06% -0.06%

Total Costs and Expenses -85.41% -85.43% -81.45% -81.83% -81.11% -80.05% -78.90% -77.68%

Gross Profit 14.59% 14.57% 18.55% 18.17% 18.89% 19.95% 21.10% 22.32%

Income from Operating Investments, net 0.29% 0.32% 0.22% 0.23% 0.22% 0.22% 0.22% 0.23%

General and Administrative Expense -3.67% -3.82% -4.38% -4.12% -4.12% -4.12% -4.12% -4.12%

Research and Development Expense, net -3.47% -4.89% -3.40% -3.53% -3.52% -3.47% -3.41% -3.35%

Gain/(Loss) on Dispositions, net 0.00% -0.01% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings from Operations 7.74% 6.17% 11.01% 10.75% 11.47% 12.58% 13.80% 15.08%

Other Income/(Loss), net -0.01% 0.04% 0.14% 0.00% 0.00% 0.00% 0.00% 0.00%

Interest and Debt Expense -0.29% -0.32% -0.39% -0.39% -0.38% -0.37% -0.35% -0.33%

Earnings Before Income Taxes 7.44% 5.89% 10.76% 10.36% 11.09% 12.22% 13.45% 14.74%

Income Tax Expense -2.06% -0.71% -1.98% -1.91% -2.04% -2.25% -2.47% -2.71%

Net Earnings from Continuing Operations 5.39% 5.18% 8.78% 8.45% 9.05% 9.97% 10.97% 12.03%

Net Loss on Disposal of Discontinued Operations 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net Earnings 5.39% 5.18% 8.78% 8.45% 9.05% 9.97% 10.97% 12.03%

The Boeing Company

Common Size Balance Sheet ‐ Sales

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

Assets:Cash and Cash Equivalents 11.76% 9.31% 9.44% 5.38% 2.25% 6.12% 10.77% 16.64%Short-Term and Other Investments 0.78% 1.30% 1.26% 1.22% 1.16% 1.16% 1.15% 1.14%Accounts Receivable, net 9.07% 9.34% 11.26% 11.26% 11.26% 11.26% 11.26% 11.26%Current Portion of Customer Financing, net 0.22% 0.45% 0.33% 0.52% 0.36% 0.35% 0.27% 0.24%Inventories, net of Advances and Progress Billings 49.17% 45.68% 47.48% 44.80% 44.50% 43.68% 42.73% 41.69%Deferred Income Taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Current Assets 70.99% 66.08% 69.77% 63.19% 59.53% 62.57% 66.19% 70.98%

Customer Financing, net 3.49% 3.99% 2.93% 2.93% 2.89% 2.81% 2.72% 2.61%Property, Plant and Equipment, net 12.56% 13.54% 13.57% 13.37% 12.79% 12.77% 12.69% 12.51%Goodwill 5.33% 5.63% 5.95% 5.59% 5.14% 4.96% 4.80% 4.61%Acquired Intangible Assets, net 2.76% 2.69% 2.76% 2.59% 2.38% 2.30% 2.22% 2.13%Deferred Income Taxes 0.28% 0.35% 0.37% 0.34% 0.32% 0.30% 0.29% 0.28%Investments 1.34% 1.39% 1.35% 1.12% 1.07% 1.08% 1.09% 1.10%Other Assets, net of Accumulated Amortization 1.46% 1.50% 2.17% 2.08% 1.95% 1.92% 1.89% 1.85%

Total Assets 98.23% 95.16% 98.87% 91.20% 86.07% 88.70% 91.88% 96.08%

Liabilities and Equity: 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Accounts Payable 11.24% 11.83% 13.07% 13.08% 12.99% 12.75% 12.47% 12.17%Accrued Liabilities 14.58% 15.53% 16.37% 15.50% 15.50% 15.50% 15.50% 15.50%Advances and Billings in Excess of Related Costs 25.35% 25.24% 29.38% 27.72% 27.53% 27.03% 26.44% 25.80%Short-Term Debt and Current Portion of Long-Term Debt 1.28% 0.41% 1.43% 1.28% 1.06% 0.65% 0.48% 1.09%Income Taxes Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Current Liabilities 52.45% 53.01% 60.25% 57.58% 57.08% 55.93% 54.89% 54.56%

Deferred Income Taxes 2.49% 1.41% 1.97% 1.85% 1.70% 1.64% 1.59% 1.53%Accrued Retiree Health Care 6.88% 6.26% 5.94% 5.36% 4.74% 4.40% 4.09% 3.78%Accrued Pension Plan Liability, net 18.50% 21.09% 17.64% 16.57% 15.09% 14.41% 13.79% 13.13%Non-Current Income Taxes Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Long-Term Liabilities 2.16% 2.35% 2.16% 1.80% 1.73% 1.69% 1.64% 1.61%Long-Term Debt 9.08% 10.12% 10.47% 10.55% 9.73% 9.56% 9.37% 9.14%

Total Liabilities 91.57% 94.24% 98.42% 93.72% 90.08% 87.64% 85.36% 83.74%

Shareholders' Equity:Common Stock & Additional Paid in Capital 10.30% 10.39% 12.70% 12.02% 11.13% 10.81% 10.51% 10.18%Treasury Stock, at cost -30.76% -38.17% -46.53% -51.76% -54.08% -52.64% -51.29% -49.74%Retained Earnings 40.32% 43.05% 48.53% 49.95% 50.65% 54.19% 58.21% 62.40%Accumulated Other Comprehensive Loss -13.26% -14.41% -14.32% -12.78% -11.76% -11.35% -10.96% -10.54%

Total Shareholders' Equity 6.59% 0.86% 0.38% -2.57% -4.07% 1.01% 6.47% 12.29%Add: Noncontrolling Interests 0.06% 0.06% 0.06% 0.06% 0.05% 0.05% 0.05% 0.05%

Total Equity 6.66% 0.93% 0.44% -2.52% -4.02% 1.06% 6.52% 12.34%

Total Liabilities and Equity 98.23% 95.16% 98.87% 91.20% 86.07% 88.70% 91.88% 96.08%

The Boeing Company

Common Size Balance Sheet ‐ Total Assets

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

Assets:Cash and Cash Equivalents 11.97% 9.78% 9.54% 5.90% 2.62% 6.90% 11.73% 17.32%Short-Term and Other Investments 0.79% 1.36% 1.28% 1.34% 1.35% 1.30% 1.25% 1.19%Accounts Receivable, net 9.23% 9.81% 11.39% 12.35% 13.08% 12.69% 12.25% 11.72%Current Portion of Customer Financing, net 0.22% 0.48% 0.33% 0.57% 0.41% 0.39% 0.30% 0.25%Inventories, net of Advances and Progress Billings 50.06% 48.00% 48.03% 49.13% 51.70% 49.24% 46.51% 43.39%Deferred Income Taxes 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Current Assets 72.28% 69.43% 70.57% 69.28% 69.16% 70.53% 72.04% 73.88%

Customer Financing, net 3.56% 4.19% 2.97% 3.21% 3.36% 3.17% 2.96% 2.72%Property, Plant and Equipment, net 12.79% 14.23% 13.72% 14.66% 14.86% 14.39% 13.81% 13.02%Goodwill 5.43% 5.92% 6.02% 6.13% 5.98% 5.60% 5.22% 4.80%Acquired Intangible Assets, net 2.81% 2.82% 2.79% 2.84% 2.77% 2.59% 2.42% 2.22%Deferred Income Taxes 0.28% 0.37% 0.37% 0.38% 0.37% 0.34% 0.32% 0.29%Investments 1.36% 1.46% 1.36% 1.23% 1.24% 1.21% 1.18% 1.15%Other Assets, net of Accumulated Amortization 1.49% 1.57% 2.20% 2.28% 2.26% 2.16% 2.05% 1.92%

Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and Equity:Accounts Payable 11.44% 12.43% 13.22% 14.34% 15.09% 14.37% 13.57% 12.67%Accrued Liabilities 14.84% 16.32% 16.56% 17.00% 18.01% 17.47% 16.87% 16.13%Advances and Billings in Excess of Related Costs 25.81% 26.52% 29.72% 30.40% 31.99% 30.47% 28.78% 26.85%Short-Term Debt and Current Portion of Long-Term Debt 1.31% 0.43% 1.45% 1.41% 1.23% 0.73% 0.52% 1.13%Income Taxes Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total Current Liabilities 53.40% 55.71% 60.94% 63.14% 66.33% 63.05% 59.74% 56.78%

Deferred Income Taxes 2.53% 1.49% 1.99% 2.03% 1.98% 1.85% 1.73% 1.59%Accrued Retiree Health Care 7.01% 6.57% 6.01% 5.88% 5.51% 4.96% 4.45% 3.94%Accrued Pension Plan Liability, net 18.84% 22.16% 17.84% 18.17% 17.53% 16.25% 15.00% 13.66%Non-Current Income Taxes Payable 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Long-Term Liabilities 2.20% 2.47% 2.18% 1.98% 2.01% 1.90% 1.79% 1.68%Long-Term Debt 9.25% 10.63% 10.59% 11.57% 11.31% 10.78% 10.20% 9.51%

Total Liabilities 93.22% 99.03% 99.55% 102.76% 104.67% 98.80% 92.91% 87.16%

Shareholders' Equity:Common Stock & Additional Paid in Capital 10.48% 10.91% 12.85% 13.18% 12.93% 12.19% 11.44% 10.59%Treasury Stock, at cost -31.32% -40.11% -47.06% -56.75% -62.84% -59.35% -55.82% -51.77%Retained Earnings 41.05% 45.24% 49.08% 54.77% 58.84% 61.10% 63.35% 64.94%Accumulated Other Comprehensive Loss -13.50% -15.14% -14.49% -14.02% -13.66% -12.79% -11.93% -10.97%

Total Shareholders' Equity 6.71% 0.91% 0.38% -2.82% -4.73% 1.14% 7.04% 12.79%Add: Noncontrolling Interests 0.07% 0.07% 0.06% 0.06% 0.06% 0.06% 0.05% 0.05%

Total Equity 6.78% 0.97% 0.45% -2.76% -4.67% 1.20% 7.09% 12.84%

Total Liabilities and Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

The Boeing Company

Value Driver Estimation

Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

EBITA:Net Sales 96,114 94,571 93,392 99,416 108,084 111,990 115,924 120,533 Less: Cost of Products Sold (73,446) (72,713) (68,365) (72,837) (78,198) (79,082) (79,621) (80,305)Less: Cost of Services (8,578) (8,018) (7,631) (8,446) (9,404) (10,499) (11,774) (13,262)Less: SG&A (3,525) (3,616) (4,094) (4,094) (4,451) (4,612) (4,774) (4,964)Less: Research & Development (3,331) (4,627) (3,179) (3,512) (3,803) (3,885) (3,956) (4,037)Add: Implied Interest - Operating Leases 226 234 210 221 230 237 244 250

EBITA 7,460 5,831 10,333 10,748 12,457 14,149 16,044 18,214

Adjusted Taxes: Provison for Income Taxes (Income Tax Expense) 1,979 673 1,850 1,895 2,205 2,518 2,869 3,270 Less: Tax on Interest or Investment Income (58) (64) (43) (48) (50) (52) (55) (57) Less: Tax on Non-Operating (Other) Income 3 (8) (27) - - - - - Add: Loss on Non-Operating Losses 0 1 (4) - - - - - Add: Tax Shield on Boeing Capital Interest Expense 13 12 15 14 14 14 14 14 Add: Tax Shield on Interest Expense 58 64 76 82 87 86 85 84 Add: Tax Shield on Implied Lease Interest 47 49 44 46 48 50 51 53

LESS: Adjusted Taxes 2,153 872 2,050 2,086 2,405 2,720 3,073 3,478

ADD: Change Deferred Tax Assets/Liabilities 237 (1,121) 492 - - - - -

NOPLAT 5,544 3,837 8,775 8,662 10,052 11,429 12,970 14,736

Operating Current Assets: Normal Cash (Lesser of Actual or 2% of Sales) 1,922 1,891 1,868 1,988 2,162 2,240 2,318 2,411 Accounts Receivable (Net) 8,713 8,832 10,516 11,194 12,170 12,610 13,053 13,572 Current Portion of Customer Financing (Net) 212 428 309 514 385 390 317 295 Inventory 47,257 43,199 44,344 44,542 48,094 48,918 49,536 50,253

Operating Current Assets 58,104 54,350 57,037 58,239 62,811 64,158 65,225 66,530

Operating Current Liabilities: Accounts Payable 10,800 11,190 12,202 13,000 14,037 14,277 14,458 14,667 Accrued Liabilities 14,014 14,691 15,292 15,410 16,754 17,359 17,969 18,683 Advances & Billings in Excess of Related Costs 24,364 23,869 27,440 27,562 29,761 30,270 30,653 31,096 Income Taxes Payable - - - - - - - -

Operating Current Liabilities 49,178 49,750 54,934 55,973 60,551 61,907 63,080 64,446

Net Operating Working Capital 8,926 4,600 2,103 2,266 2,260 2,251 2,145 2,084

Add: Net PPE 12,076 12,807 12,672 13,288 13,828 14,300 14,713 15,074 Add: PV - Operating Leases 1,289 1,241 1,145 1,200 1,249 1,292 1,329 1,362 Add: Acquired Intangibles 2,657 2,540 2,573 2,573 2,573 2,573 2,573 2,573 Add: Customer Financing (Net) 3,358 3,773 2,740 2,908 3,123 3,149 3,149 3,149 Less: Other Long-Term Liabilities (2,078) (2,221) (2,015) (1,792) (1,873) (1,888) (1,904) (1,942)

Invested Capital 26,229 22,741 19,217 20,443 21,160 21,676 22,005 22,300

NOPLAT 5,544 3,837 8,775 8,662 10,052 11,429 12,970 14,736 Beginning Invested Capital 18,001 26,229 22,741 19,217 20,443 21,160 21,676 22,005 ROIC 30.80% 14.63% 38.59% 45.07% 49.17% 54.01% 59.84% 66.97%

Beginning Invested Capital 18,001 26,229 22,741 19,217 20,443 21,160 21,676 22,005 Spread (ROIC-WACC) 22.33% 6.16% 30.12% 36.60% 40.70% 45.54% 51.37% 58.50%EP 4,019 1,616 6,849 7,034 8,321 9,637 11,135 12,873

NOPLAT 5,544 3,837 8,775 8,662 10,052 11,429 12,970 14,736 Change in Invested Capital (IC) 8,227 (3,488) (3,523) 1,226 716 516 329 295 FCF (2,683) 7,325 12,299 7,436 9,336 10,912 12,642 14,442

The Boeing Company

Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity

Risk‐free Rate 3.189%

Market Risk Premium 5.00%

Beta 1.12                

Cost of Equity 8.79%

Cost of Debt

Pre‐tax 3.52%

Marginal Tax Rate 21%

After‐Tax Cost of Debt 2.78%

Market Value of Equity

Share Price $369.35

Shares Outstanding 591                 

Market Value of Equity 218,286$       

Market Value of Debt

STD & Current Portion LTD 1,335              

LTD 9,782              

PV Operating Leases 1,145              

Market Value of Debt 12,262            

Market Weights

% Equity 94.68%

% Debt 5.32%

WACC 8.47%

The Boeing Company

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

Key Assumptions:

     CV ‐ Growth 3.25%

     CV ‐ ROIC 66.97%

     WACC 8.47%

     Cost of Equity 8.79%

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022 (CV)DCF Model

NOPLAT 8,662          10,052          11,429      12,970         14,736 

Less: CapEx 1,226               716               516               329               295 

Free Cash Flow 7,436            9,336          10,912          12,642         14,442 

Continuing Value      268,633 

Cash Flow to Discount 7,436  9,336           10,912        12,642        268,633     

Discount Periods 1  2  3  4  4 

PV of Cash Flows 6,855  7,935           8,550           9,132           194,057     

Value of Operating Assets 226,530             

Add: Excess Cash 6,945 

Add: Marketable Securities 1,179 

Add: Other Non‐Operating Assets 2,027 

Add: Long Term Investments 1,260 

Add: Tax Loss Carryovers 299 

Less: Debt 11,117                

Less: PV of Operating Leases 1,145 

Less: ESOP 1,230 

Less: Accrued Retiree Healthcare 5,545 

Less: Pension Liability 16,471                

Value of Equity 202,733             

Shares Outstanding 570 

Intrinsic Value per Share 355.38$             

Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022 (CV)

NOPLAT 8,662  10,052        11,429        12,970        14,736       

Beginning Invested Capital 19,217                 20,443        21,160        21,676        22,005       

ROIC 45.07% 49.17% 54.01% 59.84% 66.97%

WACC 8.47% 8.47% 8.47% 8.47% 8.47%

Economic Profit 7,034  8,321           9,637           11,135        12,873       

Continuing Value 246,628     

Cash Flow to Discount 7,034  8,321           9,637           11,135        246,628     

Discount Periods 1 2 3 4 4

PV of Cash Flows 6,485  7,072           7,551           8,043           178,161     

Value of Economic Profit 207,313             

Add: Beginning Invested Capital 19,217                

Value of Operating Assets 226,530             

Add: Excess Cash 6,945 

Add: Marketable Securities 1,179 

Add: Other non‐operating assets 2,027 

Add: Long Term Investments 1,260 

Add: Tax Loss Carryovers 299 

Less: Debt 11,117                

Less: PV of Operating Leases 1,145 

Less: ESOP 1,230 

Less: Accrued Retiree Healthcare 5,545 

Less: Pension Liability 16,471                

Value of Equity 202,733             

Shares Outstanding 570 

Intrinsic Value per Share 355.38$             

Model Date 11/9/2018

Next FYE 12/31/2018

Last FYE 12/31/2017

Days in FY 365 

Days Elapsed 313 

Elapsed Fraction 0.858

Adjusted Stock Price 382.00$             

Economic Profit (EP) Model

Discounted Cash Flow (DCF) Model

Partial‐Year Price Adjustmet

The Boeing Company

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

Fiscal Years Ending  2018E 2019E 2020E 2021E 2022 (CV)

EPS 14.73$               17.65$     20.15$     22.95$     26.15$       

Key Assumptions:

   CV ‐ Growth 3.25%

   CV ‐ ROE 193.34%

   Cost of Equity 8.79%

Future Cash Flows

     P/E Multiple (CV Year) 17.75

     EPS (CV Year) 26.15$       

     Future Stock Price 464.26$     

     Dividends Per Share 6.88  8.24         9.41         10.72       464.26       

     Future Cash Flows 6.88  8.24         9.41         10.72       464.26       

     Discount Periods 1  2 3 4 4

     Discounted Cash Flows 6.32  6.96         7.31         7.65         331.45       

Intrinsic Value 359.69$           

Model Date 11/9/2018

Next FYE 12/31/2018

Last FYE 12/31/2017

Days in FY 365 

Days Elapsed 313 

Elapsed Fraction 0.858

Adjusted Target Price 386.64$           

The Boeing Company

Relative Valuation Models

EPS EPS

Ticker Company Price 2018E 2019E P/E 18 P/E 19

AIR:FP Airbus SE $108.11 $4.97  $6.41  21.75        16.87       

AM:FP Dassault Aviation SA $1,600.84 $74.07  $92.10  21.61        17.38       

LMT:US Lockheed Martin Corp $317.41 $17.24  $19.02  18.41        16.69       

NOC:US Northrop Grumman $300.60 $16.88  $18.88  17.81        15.92       

GD:US General Dynamics $187.02 $11.23  $12.32  16.65        15.18       

RTN:US Raytheon $189.18 $9.93  $11.60  19.05        16.31       

UTX:US United Technologies $128.32 $7.23  $7.92  17.75        16.20       HXL:US Hexcel Corp $57.59 $3.05  $3.46  18.88        16.64       

AVERAGE 18.99        16.40       

BA The Boeing Company $369.35                 14.73           17.65  25.1           20.9          

Implied Relative Value:

   P/E (EPS18)  $          279.76 

   P/E (EPS19) 289.41$          

The Boeing Company

Key Management Ratios

Fiscal Years Ending  2015 2016 2017 2018E 2019E 2020E 2021E 2022 (CV)

Liquidity Ratios:

Current Ratio (Current Assets / Current Liabilities) 1.35         1.25         1.16             1.10              1.04             1.12             1.21            1.30         

Quick Ratio (Cash + ST Investments + Receivables) / (Current Liabilities) 0.41         0.38         0.36             0.31              0.26             0.33             0.42            0.53         

Cash Ratio (Cash / Current Liabilities) 0.22         0.18         0.16             0.09              0.04             0.11             0.20            0.30         

Activity or Asset‐Management Ratios:

Receivables Turnover (Total Revenue / Beginning Receivables) 12.44      10.85      10.57           9.45              9.66             9.20             9.19            9.23         

Days' Receivables  (365 / Receivables Turnover) 29.35      33.63      34.52           38.61            37.80           39.67           39.70          39.53       

Inventory Turnover (Cost of Products / Beginning Inventory) 1.57         1.54         1.58             1.64              1.76             1.64             1.63            1.62         

Financial Leverage Ratios:

Debt Ratio (Total Debt / Total Assets) 0.11         0.11         0.12             0.13              0.13             0.12             0.11            0.11         

Debt‐to‐Equity Ratio (Total Debt / Total Equity) 1.56         11.35      26.98           4.70              2.69             9.59             1.51            0.83         

Profitability Ratios:

Gross Margin (Total Revenue ‐ COGS) / (Total Revenue) 14.59% 14.57% 18.55% 18.17% 18.89% 19.95% 21.10% 22.32%

Return on Assets (Net Income / Average Total Assets) 5.35% 5.31% 8.99% 9.18% 10.65% 11.61% 12.36% 13.04%

Return on Equity (Net Income / Beginning Total Shareholder's Equity) 59.73% 77.27% 1003.30% 2367.34% ‐382.36% ‐253.90% 1120.20% 193.34%

Profit Margin (Net Income / Total Revenue) 5.39% 5.18% 8.78% 8.45% 9.05% 9.97% 10.97% 12.03%

Payout Policy Ratios

Dividend Payout Ratio (Dividends / EPS) 50.80% 60.91% 43.90% 46.68% 46.68% 46.68% 46.68% 46.68%

Retention Ratio (1‐ Dividend Payout Ratio) 49.20% 39.09% 56.10% 53.32% 53.32% 53.32% 53.32% 53.32%

The Boeing Company

Sensitivity Analysis

382.00$       0.92           1.00           1.12           1.32           1.52           382.00$       3.10% 3.30% 3.52% 3.70% 3.90%

4.70% 510.57      465.31      409.72      339.81      288.47      11.00% 384.39      384.01      383.58      383.23      382.84     

4.85% 493.05      449.24      395.43      327.73      278.01      16.00% 383.63      383.23      382.79      382.43      382.03     

5.00% 476.61      434.16      382.00      316.38      268.17      21.00% 382.86      382.46      382.00      381.63      381.22     

5.15% 461.14      419.96      369.37      305.70      258.92      26.00% 382.10      381.68      381.21      380.83      380.40     

5.30% 446.56      406.58      357.46      295.63      250.19      31.00% 381.33      380.89      380.42      380.02      379.58     

382.00$       2.25% 2.75% 3.25% 3.75% 4.25% 382.00$       2.80% 3.00% 3.19% 3.40% 3.60%

7.90% 367.59      398.64      436.37      483.18      542.83      45.00% 404.53      387.69      372.90      357.53      343.97     

8.20% 345.80      373.21      406.16      446.52      497.09      55.00% 410.02      392.95      377.95      362.37      348.62     

8.47% 328.02      352.65      382.00      417.57      461.56      66.97% 414.43      397.17      382.00      366.25      352.35     

8.80% 308.23      329.95      355.58      386.29      423.74      75.00% 416.61      399.25      384.00      368.16      354.19     

9.10% 291.93      311.40      334.20      361.25      393.89      85.00% 418.74      401.29      385.96      370.04      355.99     

382.00$       0.92           1.00           1.12           1.32           1.52           382.00$       2.25% 2.75% 3.25% 3.75% 4.25%

2.80% 525.79      475.35      414.43      339.38      285.33      45.00% 322.74      345.63      372.90      405.95      446.84     

3.00% 499.40      453.32      397.17      327.20      276.28      55.00% 325.67      349.52      377.95      412.39      455.00     

3.19% 476.61      434.16      382.00      316.38      268.17      66.97% 328.03      352.66      382.00      417.57      461.56     

3.40% 453.32      414.42      366.25      305.02      259.58      75.00% 329.19      354.20      384.00      420.12      464.80     

3.60% 433.08      397.16      352.35      294.88      251.86      85.00% 330.33      355.71      385.96      422.62      467.97     

Sensitivity Analysis

Risk‐Free 

Rate

Pre Tax Cost of Debt

Marginal Tax Rate

Risk Free Rate

CV ROIC

CV Growth Rate of NOPLAT

CV ROIC

Beta

Equity Risk 

Premium

WACC

CV Growth of NOPLAT

Beta

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

Number of Options Outstanding (shares):  4

Average Time to Maturity (years): 3.93

Expected Annual Number of Options Exercised: 1

Current Average Strike Price: 71.69$               

Cost of Equity: 8.79%

Current Stock Price: $369.35

2018E 2019E 2020E 2021E 2022 (CV)Increase in Shares Outstanding: 1.12 1.12 1.12 1.12 1.12

Average Strike Price: 71.69$                71.69$          71.69$          71.69$          71.69$         

Increase in Common Stock Account: 80.60           80.60            80.60            80.60            80.60           

Change in Treasury Stock 8,000 7,000 500 500 500

Expected Price of Repurchased Shares: $369.35 401.81$        437.13$        475.55$        517.34$       

Number of Shares Repurchased: 21.66                  17.42            1.14               1.05               0.97              

Shares Outstanding (beginning of the year) 591.00 570.46 554.17 554.15 554.22

Plus: Shares Issued Through ESOP 1.12 1.12 1.12 1.12 1.12

Less: Shares Repurchased in Treasury 21.66                  17.42             1.14               1.05               0.97              

Shares Outstanding (End of the Year) 570 554 554 554 554

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol BA

Current Stock Price $369.35

Risk Free Rate 3.19%

Current Dividend Yield 2.00%

Annualized St. Dev. of Stock Returns 34.91%

Average Average B‐S Value

Range of Number Exercise Remaining Option of Options

Outstanding Options of Shares Price Life (yrs) Price Granted

Range 1 4.42 71.69 3.93 278.42$      1,230$               

Total 4 71.69$         3.93 306.27$      1,230$               

Present Value of Operating Lease Obligations (2017) 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)

Operating Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 493.052218583589 Leases Fiscal Years Ending 493.052218583589 Leases Fiscal Years Ending  Leases

2018 216 2017 233 2016 240 2015 221 2014 223

2019 201 2018 210 2017 217 2016 203 2015 171

2020 157 2019 182 2018 182 2017 175 2016 142

2021 115 2020 135 2019 157 2018 146 2017 120

2022 96 2021 95 2020 117 2019 123 2018 95

Thereafter 570 Thereafter 620 Thereafter 602 Thereafter 618 Thereafter 650

Total Minimum Payments 1355 Total Minimum Payments 1475 Total Minimum Payments 1515 Total Minimum Payments 1486 Total Minimum Payments 1401

Less: Interest 210 Less: Interest 234 Less: Interest 226 Less: Interest 226 Less: Interest 235

PV of Minimum Payments 1145 PV of Minimum Payments 1241 PV of Minimum Payments 1289 PV of Minimum Payments 1260 PV of Minimum Payments 1166

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 3.52% Pre‐Tax Cost of Debt 3.52% Pre‐Tax Cost of Debt 3.52% Pre‐Tax Cost of Debt 3.52% Pre‐Tax Cost of Debt 3.52%

Number Years Implied by Year 6 Payment 5.9 Number Years Implied by Year 6 Payment 6.5 Number Years Implied by Year 6 Payment 5.1 Number Years Implied by Year 6 Payment 5.0 Number Years Implied by Year 6 Payment 6.8

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

1 216 208.7 1 233 225.1 1 240 231.8 1 221 213.5 1 223 215.4

2 201 187.6 2 210 196.0 2 217 202.5 2 203 189.4 2 171 159.6

3 157 141.5 3 182 164.1 3 182 164.1 3 175 157.7 3 142 128.0

4 115 100.1 4 135 117.6 4 157 136.7 4 146 127.1 4 120 104.5

5 96 80.8 5 95 79.9 5 117 98.4 5 123 103.5 5 95 79.9

6 & beyond 96 426.0 6 & beyond 95 458.8 6 & beyond 117 455.9 6 & beyond 123 469.0 6 & beyond 95 478.5

PV of Minimum Payments 1144.6 PV of Minimum Payments 1241.4 PV of Minimum Payments 1289.4 PV of Minimum Payments 1260.2 PV of Minimum Payments 1165.9