Last year Boeing’s shares fell on bad news of its plane crashes, but its fundamentals were weak. This year its shares have fallen another 75%, but this time its fundamentals is the bad news. This is why great companies don’t always make for great investments.
As I’ve written in the past, I am not one to make “calls” (though I did just that in Apple’s epic stock price decline – warning or opportunity?). And when I’m proven right, I don’t like to say “I told you so” (even though I did here, On Uber – I told you so). And now, with Boeing Co. (NYSE: BA) resurfacing in the headlines – “Boeing Craters Again on Investor’s Alarm Over U.S. Bailout Quest” (March 18, 2020 – Yahoo Finance) – I may look like a soothsayer, but I’m not.
I’m referring to my May 16, 2019 blog post – Boeing: Bad Investment but not Because of 737-MAX – in which I pilloried Boeing’s stock after it had fallen more than 10% following the two 737-Max crashes. Up to that point, Boeing had delivered fairly solid shareholder value for ten straight years. So, when the price fell sharply to $376 (on May 3, 2019), down from its then-recent high of $446, investors were looking at it as an opportunity to buy a great company at a discount.
As of March 18, 2020, Boeing’s stock is selling at $100. So, if you loved Boeing at $376, can you love it any more at $100 a share?
Sometimes in investing, love is blind
In that blog post, I made the point that, if you didn’t love Boeing before the plane crashes, what would make you love it after the crashes? While Boeing may be a great company, it was not a great investment, and I provided the following reasons:
- The company has persistently generated low-profit margins, averaging 6.6% over the last ten years.
- It carries an outsized long-term debt to total capitalization of 75%.
- Its return on available cash flow to shareholders (i.e., dividends, increases in shareholder equity) has consistently underperformed the Russell 3000.
And, that was before the impact of the plane crashes on its order backlog of 4,600 planes, the loss of confidence among its airline customers, and the mounting legal issues that could drag on for years – all of which will impact its earnings for the foreseeable future.
That was then…
Here we are ten months later, and the company is now sitting with negative equity. After nearly doubling its debt to $27 billion in 2019, Boeing has already borrowed another $14 billion in 2020. And now, facing an inevitable liquidity crunch from the coronavirus-fueled economic disruption, the company is seeking tens of billions of dollars in U.S. government loan guarantees.
And, one year after the grounding of all 737-MAX planes, the company has yet to win approval from regulators to return them to service. With airlines now reconsidering their purchases of planes they have already ordered, it will inevitably cause a cash crunch. After estimating Boeing’s free cash flow to come in at a positive $2 billion in 2020, Standard & Poor’s now expects a range of negative $11 billion to $12 billion, prompting the rating agency to lower its credit rating to BBB from A-.
So my point is…
My point is not to kick a company when it’s down. And I certainly don’t want to come across as gloating. I’m not. I’m merely using this as an opportunity to reinforce one of our most important investment tenets: That great companies don’t necessarily make great investments, regardless of the price. It was the negative news of two tragic plane crashes that sent Boeing’s stock price to a seemingly attractive level last May. But its fundamentals were weak then, and this time its worsening fundamentals were the negative news.
With the help of the U.S. government, Boeing will very likely turn things around and emerge at some point a stronger company. We hope so because the country needs a strong Boeing. But for investors looking for value with growth potential, there are several other aerospace stocks probably selling at a discount right now with much better stories to tell.