Boeing will survive its wounds but too many have been self-inflicted
JAL 787-9 on final assembly line at Boeing S.C. Image by airbus777 on flicker, CC BY 2.0 creativecommons.org
By Paul Meeks
Boeing is a big deal. It is one of America’s greatest exporters — and we do not export much from this country. Its production of the 787 Dreamliner aircraft in North Charleston is critical to our local economy. Therefore, no surprise, our editor has asked me to revisit the company. I wrote an article about Boeing for the Mercury years ago, but lots has changed since I had given that bullish thesis. I was right to have recommended it until Boeing’s troubles — serious troubles — began when its marquee 737 MAX plane crashed in October 2018 and March 2019, which led to the grounding of that aircraft from March 2019 through December 2020. Of course, during that nastiness, COVID-19 struck, and commercial air travel plunged by two-thirds. Last, to rub salt in its wounds (plural), Boeing had been and continues to be beset by manufacturing stumbles, including a few here at 5400 International Boulevard.
I mostly write about investing. The stock market typically is an efficient pricing mechanism. Today, it values Boeing at $234 per share, or a total $137 billion plus $42 billion in net (i.e., partially offset by cash) debt. The problem is that at its peak in March 2019 the stock traded at $441, so today you can buy Boeing at about half its glory days price. I remember that Shangri-La. The company had just finished a year in which it had $102 billion in sales of which $9 billion, or $16 per share, had dropped to the bottom line. To put this in perspective, Boeing lost -$13 billion in 2020 on $77 billion in revenue.
During its 2018 and 2019 nirvana, the company’s services business was growing fast. Think of it as Boeing offering Alaska Airlines data analytics software with its jets. Services are sexy. The profit margin can be much higher than it is for manufacturing. Services revenues reoccur whereas selling planes is a lumpy business. In that era, some analysts were valuing the company, or at least its emerging services unit, like a Silicon Valley startup. No one sees Boeing that way anymore, so I dissuade you from investing in it with that thesis. In the end, Boeing again proved to be a cyclical company. Therefore, even as the firm rebounds, do not expect Boeing’s stock to retest its record high.
In addition to Global Services, Boeing reports two other business segments, Commercial Airplanes and Defense, Space and Security. Last quarter, Commercial Airplanes was still depressed due to COVID-19 continuing to stunt business travel and manufacturing miscues, which delayed aircraft deliveries and their revenue recognition, but the group still posted $4.3 billion in sales versus $7.2 billion for Defense, Space and Security and $3.8 billion for Global Services. At this stage of the company’s recovery, only Commercial Airplanes is still bleeding, but it is hemorrhaging less. It had lost -$856 million during the past three months, but it had suffered a -$2.1 billion beating in the same quarter a year ago.
Luckily, Boeing is and should continue to be an oligopolist in Commercial Airplanes. Particularly for long haul aircraft, there really are only two players, Boeing and Airbus, which is owned by a European consortium including governments. If and when Boeing stops shooting itself in the foot with regulatory and manufacturing nonsense, it has years of ordered planes to deliver. At the end of May 2021, the company had orders for 4,879 aircraft worth a total $283 billion, which should take more than seven years to deliver as production normalizes, but that will not be anytime soon. If you are a Boeing investor, or if you watch its Commercial Airplanes business, focus on the 737 MAX and not the 787 Dreamliner built in North Charleston. The latter gets local press, but the former moves the needle at the company. It accounts for 82 percent of the planes (i.e., units and not dollars) backlog. Specifically, as it pertains to the Dreamliner, Boeing has 484 aircraft in backlog, but the company has only delivered 13 in 2021. Yes, if you keep your job at Boeing despite manufacturing fumbles at our local plant, you still have years of work to fulfill promises to customers.
I look for “tells” when I evaluate a company. Despite all the hemming and hawing, these are the issues that matter most: In addition to ramping the 737 MAX, I look for Boeing to pare its debt. It had already been heavily levered and then it desperately borrowed more during COVID, so now the firm owes $64 billion, which is only partially offset by $21 billion in cash and marketable securities. The interest expense due is a tremendous burden. Boeing just replaced its chief financial officer. I will watch how quickly he (Brian West) reduces the company’s debt because although Boeing is returning to profitability and is generating free cash flow (i.e., after maintenance expenditures), its debt load scares me and does not leave much cushion, particularly if COVID’s delta variant stifles travel again.
Postscript: On July 28, Boeing announced its June quarter financial results. The stock popped +4 percent on the obviously good news, or it was at least better than expectations. The company had been forecast to lose -$0.72 per share but it earned $0.40. That compared to a hideous COVID loss of -$4.79 per share in the same quarter a year ago. A lingering loss in Commercial Airplanes was more than offset by gains in Defense, Space and Security and Global Services. The Dreamliner was disappointing, but that was a “known unknown”; and Boeing’s CEO, Dave Calhoun, expressed optimism in its turnaround. The average Wall Street price target for Boeing’s shares has been revised to $275. The day after Boeing’s announcement the stock is trading at $234, so it is at a 15 percent discount to “fair value.” This looks reasonable to me, although no one expects commercial travel, particularly international routes in wide-body aircraft, to return to its pre-COVID level until at least 2023-2024. I think that squashing the Delta COVID-19 variant is key to returning to normal travel here but more so abroad.
In my view, if you own Boeing shares, I would hold them at this point and price. The company and the global airlines that it serves are on the mend. However, if you are tempted to buy Boeing, I would not. The stock already has rallied from $142 in November 2020 to $234 today. The easy money has been made and there still is risk in Boeing’s recovery. I am particularly worried about its $64 billion debt. Also, I think that there are bigger fish to fry among U.S. stocks, so ask me about them.
Paul Meeks, CFA, CAIA is a portfolio manager at Independent Solutions Wealth Management. He also is the Professor of Practice in the Baker School of Business at The Citadel. He is on Daniel Island. He is at firstname.lastname@example.org.
All opinions expressed by Paul Meeks are solely his and do not reflect those of Independent Solutions Wealth Management, LLC through which he manages client assets. This material is for educational purposes only and is not to be taken as investment advice.