Published: November 22, 2024
By: Philip MacKellar
Is Boeing a buy after securing a deal with its unionized employees? This was a huge strike, after all, lasting nearly two months and including approximately 33,000 machinists. Surely having it out of the way is a good thing, and it is clear flying from here on out?
Well, yes and no. The work stoppage is over, but the American company still plans to lay off roughly 17,000 workers, and the strike may have cost the corporation US$100-million in lost revenue per day. That will have significant financial impacts running into the billions when it next reports earnings.
Moreover, if you have watched the news the past few years, you will have noticed Boeing in the headlines for all the wrong reasons. The union strike has dominated the recent news cycle, but the company’s thorniest problem relates to quality control and safety.
In 2018 and 2019, two crashes involving Boeing’s 737 MAX jets claimed the lives of nearly 350 people. The crashes were linked to the company’s Maneuvering Characteristics Augmentation Systems and forced Boeing to ground its fleet of 737 MAX jets for nearly two years. Then, this year, there have been four significant incidents involving Boeing aircraft, including a mid-air blowout of a door plug in January.
Fatal and near-fatal events have exposed manufacturing issues at Boeing and its suppliers. Spirit Aerosystems, for example, produced the door-plug involved in the January mid-air blowout. Boeing and Spirit are looking to merge in an effort to improve quality control, but that may not address the safety defects. Moreover, the financial situation at Spirit is worse than at Boeing, and both organizations have negative equity.
These incidents have turned off airline customers, drawn the ire of regulators and shaken the trust of the flying public. All of this ultimately impacts the financials. In 2018, Boeing’s revenues were US$101.1-billion against US$73.3-billion in the trailing 12-month period. The organization has posted net losses each year since 2018, and operating cash flows have been in the red for the majority of this time.
That has weakened the balance sheet. The short-term debt has increased to US$4.5-billion from US$2.7-billion, and long-term debt has ballooned to US$52.9-billion from US$8.5-billion.
In the past year, the resulting financial strain has resulted in credit rating downgrades, threatening Boeing’s investment-grade credit rating. In response, the organization was compelled to raise over US$20-billion in common stock and depository shares.
This has stabilized the financial situation, at least for now, but the losses associated with the strike and layoffs are about to hit home. This means Boeing could lose its investment-grade credit rating and has a long way to go before reaching profitability and rightsizing the balance sheet.
To add insult to injury, the company faces problems in its spacecraft and military divisions. The Starliner Crewed Test Flight has essentially marooned two astronauts in space since the summer of this year, and they will likely remain there until they are rescued by SpaceX early next year.
The Starliner fiasco has cast a pall over Boeing’s spacefaring ambitions. While the future of the military and defence division is not in doubt, it has been losing billions on military contracts. Boeing has just hired a Northrop Grumman executive to revamp the division and wring out costs.
Boeing could also be swept up into politics in the second term of U.S. president Donald Trump. The enterprise is a significant exporter for the U.S. and could be a trade war casualty. In 2021, the U.S. and European Union agreed to put a decades-long trade dispute on pause for five years in the name of cooperation against China.
Prior to this detente, the U.S. accused the EU of illegally subsidizing Airbus, the European company that is Boeing’s biggest competitor, while the EU accused the U.S. of doing the same with Boeing. This trade spat could reignite under Mr. Trump, and it is hard to quantify what the impacts may be for Boeing in the years ahead.
Despite all the turbulence, there are reasons to be bullish. The backlog is truly huge. At the end of the second quarter, it stood at US$516-billion. This means the company has roughly seven years of business in front of it – assuming sales remain flat versus the trailing 12 months, and assuming no new orders come in and no existing orders disappear.
The aerospace giant is asset rich. According to Bloomberg, it is considering selling its Jeppesen Unit. Boeing acquired this navigational information and software outfit for US$1.5-billion in 2000. With an asking price of US$6-billion, selling it could fetch a pretty penny, help improve liquidity and reduce debt.
The executive team and board of directors could also opt for more secondary share offerings. Though this would dilute existing owners, if the proceeds from the capital raise were deployed effectively, it could bridge the cashflow shortfall as the company attempts to get back into the black.
Boeing has an implicit government backstop as well. It is too closely tied to the U.S. military and national defence to fail. This does not mean, however, that the government would make investors whole. Far from it, in fact, as the history of bailouts suggests investors would likely end up taking an aggressive haircut.
Nevertheless, this implicit government safety net may explain why the short interest is low. The most shorted S&P 500 names include Charter Communications, International Paper and Walgreens Boots Alliance. All of them are in a similar situation with poor financials and weak operating results, yet Boeing’s short interest is 2.5 per cent, while Charter Communications is 13.4 per cent; International Paper, 12.8 percent; and Walgreens, 12.2 percent.
In addition to having a government backer, the aerospace business is a high barrier-to-entry industry. It is hard to build aircraft – just ask the folks at Bombardier. The upfront costs are massive, the capital expenditures necessary to stay competitive are huge, and the engineering and manufacturing challenges are never-ending.
This explains why the industry has been a duopoly between Boeing and Airbus for a long time. Established firms like such as Bombardier and Embraer are small fries compared with them, and upstarts including Commercial Aircraft Corporation of China and Russia’s United Aircraft Corporation are minnows, too.
Better yet, the industry has good prospects as developing economies around the world grow richer and their citizens fly more regularly. In the decades ahead, it is likely that more people will be flying, thereby using Boeing’s products.
Finally, and perhaps the most important bullish argument of all is: the low valuations. The company looks cheap relative to the market, the sector and where it has traded historically. There is so much pessimism surrounding the organization – not much would need to go right for the shares to pop, and if management can pull off a string of positive headlines, the stock could rally hard.
For our part, the stock is worthy of a spot on our watchlist of contrary corporations – but it has a lot of work to do before we take a flyer on it.
