Recent headlines about the 737-MAX crashes have beaten down Boeing’s stock. Some investors are looking at it as a buying opportunity. But, if you didn’t love Boeing before, what would make you love it after the crashes?
A question that has come up a lot in the last couple of months is whether investors should be buying Boeing Co. (NYSE: BA) stock after its steep decline due to the recent plane crashes. The question I pose in return is whether anyone would even be thinking about Boeing had the plane crashes not happened. You might argue that I am missing the point – that Boeing’s stock is ten percent cheaper because of the plane crashes, so now is a good buying opportunity. My point is, if you didn’t love Boeing enough to own it before, what would make you love it more after the plane crashes?
You might point to Warren Buffett when he invested in sinking Goldman Sachs shares at the height of the financial crisis, or when he invested in American Express shares that were decimated at the time of the “Salad Oil Scandal” in 1963*, both of which paid off handsomely for Buffett. But, the reason why they did was that they were both good investments before the market hammered them. Buffett, a master of due diligence, was able to determine that these companies were great investments before their scandals and could perform well in the long term despite their short-term setbacks.
For Boeing, which is dealing with two disastrous crashes involving its best-selling 737-MAX airliners, it may well turn out to be a short-term setback – something from which a great company should be able to recover over the longer term. An astute investor might see this tragic episode as an opportunity to buy a great company at a discount (as of May 3rd it is selling for $376/share, down from its recent high of $446/share). However, in the case of Boeing, investors might want to look behind the headlines to examine whether the company is a good investment to begin with.
Boeing Takes a Major Short-Term Hit
As of this writing, the entire fleet of 737-MAX airliners, which began service in 2017, is still grounded, awaiting a software fix and upgraded training. As the most popular passenger airliner sold in the world, its grounding is impacting the entire travel industry, costing airline customers tens of millions. For Boeing, it is impacting current revenues and will likely affect its order backlog of more than 4,600 planes, which represents 80% of the company’s total backlog. With more 737-MAX airliners in production than are in service, Boeing is expected to take a huge hit on earnings in the foreseeable future.
Another major challenge facing Boeing is the public relations backlash and the loss of confidence among its airline customers. Boeing has only one other competitor, Airbus, but it is already winning some orders as a result of the catastrophe. However, the biggest challenge for Boeing is its mounting legal issues that could drag on for years and cost the company billions in fines and liability claims.
Boeing’s Real Problem is not the 737-MAX
With all that said, the 737-MAX is not the problem with Boeing. Its long-term performance as a company is the problem with Boeing. Don’t get me wrong. As an investment, Boeing stock has performed well over the last decade, returning nearly four times the S&P 500. It’s a good company with a wide moat and a solid dividend.
If you’ve owned Boeing for the last ten years, you may love it. But, if you don’t own Boeing stock, and are looking for growth opportunities based on sound fundamentals, you may find yourself wondering what there is to love? The company is persistently generating low profit margins, averaging 6.6% over the last ten years. It carries an outsized long-term debt to total capitalization of 75%. And, the company has fared poorly in allocating cash flow to the benefit of shareholders. Its return on available cash flow to shareholders (i.e. dividends, increases in shareholder equity) has consistently underperformed the Russell 3000. Sorry, but it’s tough to love a company that doesn’t love its shareholders.
It will be difficult for the company to improve on any of these factors under their current circumstances and there is no indication that their problems will go away anytime soon. There are serious problems not yet reconciled in the technical aspects of the 737-MAX and the company has not proven it will be able to get past the public relations and negative customer perceptions.
Headlines Don’t Tell the Whole Story
It’s true that negative headlines can sometimes create opportunities. However, investors should be wary about basing their investment decisions on them unless they can determine the fundamental soundness of a company based on important metrics, such as profitability, indebtedness, and how well management treats shareholders. It’s important to separate the headlines of the day (the “shiny metal object”) from the true substance of a company as an investment. Sometimes looking beyond the headlines will reveal an unusual buying opportunity (Buffett’s investment in Goldman in 2009), but it can also help you realize that negative headlines are just another reason to avoid investing in a bad company.
