Porter Stansberry on Boeing and a book on 'Warren Buffett's Mistakes'

1) I'm at a corporate retreat with my old friend Porter Stansberry...

As regular readers know, he's the founder of Stansberry Research.

Porter is always a lot of fun to spend time with because there's never a dull moment, both activity-wise and intellectually. He's also a font of new ideas.

I want to share a couple he offered up yesterday...

I knew he had written negatively about Boeing (BA), so I asked him whether he'd seen Sunday night's segment of Last Week Tonight With John Oliver, in which the comedian had blasted the company:

Specifically, Oliver went after Boeing's concerning recent safety record. As you likely heard, earlier this year, a door came off a Boeing 737 MAX 9 plane (flown by Alaska Airlines) mid-flight. And the plane had been delivered by Boeing to Alaska Airlines just two months earlier.

"That's too soon for a sneaker to fall apart," Oliver said, "let alone a multimillion-dollar aircraft!"

Porter hadn't seen Oliver's segment, so I sent him the link. As he watched it, he roared with laughter and kept saying, "This is what I've been talking about!"

It turns out, he had published an essay on Boeing 14 months ago: Coming Soon: The Boeing Collapse.

In it, he argued that "a series of disastrous decisions [had] brought Boeing to the brink of bankruptcy." Like Oliver, Porter traced the beginning of the once-great company's slide to its 1997 merger with fellow aerospace manufacturer McDonnell Douglas:

Boeing was known for quality, and McDonnell was known for financial engineering – with a focus on cost cutting and the company's share price. And though the Boeing name survived, it was the McDonnell Douglas attitude that prevailed...

McDonnell CEO Harry Stonecipher, who took over day-to-day operations at Boeing, immediately took a carving knife to Boeing's highly paid engineering staff. The resulting labor strike shut down production for 40 days in 2000.

And in May 2001, Boeing management made a physical break with its engineering staff: manufacturing headquarters stayed in Seattle, while corporate moved to downtown Chicago, 1,700 miles away.

As Porter explained, Boeing was then hit by a series of scandals. He then went on to discuss how the company engaged in destructive financial engineering that initially boosted its stock price (and executive compensation).

But as he continued, both shareholders and passengers paid a terrible price:

Two years after delivering the first of its 737 Max-8 planes in 2017, two deadly crashes were directly attributed to faulty software – Lion Air Flight 610 and Ethiopian Airlines Flight 302 – killing all 346 passengers and crew on board both flights.

A Department of Justice investigation found Boeing guilty of "conspiracy to defraud the United States over the 737 MAX certification." The company paid $2.5 billion in fines.

It got worse. Boeing was forced to ground its entire fleet of 737 Max-8 planes from March 2019 through December 2020 in the U.S., and longer in other jurisdictions. Then in 2020, COVID-19 travel restrictions kneecapped the airline industry, and Boeing's cash flow plummeted.

As Porter explained, the company is hobbled by a massive debt load as a result. Today, its debt stands at more than $50 billion. And as Porter also said in his essay:

In the last 12 months, Boeing generated just $2.3 billion in free cash flow – not nearly enough to support its bloated balance sheet in the long run.

And over the next four years alone, Boeing faces a wall of $22 billion in debt maturing.

Keep in mind that interest rates are higher now, and Boeing's stressed finances put it in an uncomfortable headlock. Boeing will likely find itself unable to repay or refinance these bonds at anything less than usurious interest rates. Throw in the potential for a sharp recession – bad for travel, worse for airlines – and Boeing's financial situation goes from precarious to impossible.

Fast-forward to January 9 of this year, Porter published a follow-up piece: We Told You So... After summarizing his views, he concluded:

Boeing's planes keep killing passengers and falling apart in mid-air. These outcomes are the result of years of bad ideas – starting with the intentional destruction of Boeing's engineering culture, followed by GE-style financial engineering...

Today, Boeing has a market cap of about $112 billion and net debt of nearly $40 billion (more than $50 billion of total debt, offset by more than $10 billion of cash). Despite terrible mismanagement, it's still a powerful business – part of a global oligopoly with Europe-based Airbus – with a huge moat around it. So I don't think it's likely to go bankrupt.

Some bottom-fishing investors might even be tempted to buy Boeing's stock. Today, it's down more than 50% from its all-time high and trades at levels first reached seven years ago, as you can see in this 10-year stock chart:

But until I see clear evidence of a massive change in Boeing's corporate culture, I wouldn't put new money to work in this stock.

2) Porter and I are both fans of Berkshire Hathaway's (BRK-B) Warren Buffett, whom we both consider to be the greatest investor of all time.

So I was a little puzzled when Porter suggested to me, "Let's write a book together called Warren Buffett's Mistakes!"

"Huh?" I answered. "Why would I want to talk trash about one of the people I admire most in the world?"

"No, you don't understand," he explained. "What better way is there to teach others how to invest like Buffett than to look at the biggest mistakes he has made in his career – and then show how he learned from them so he never repeated them?"

"That's brilliant!" I exclaimed... "It's like Charlie Munger said, 'Invert, always invert.'"

"Exactly," Porter agreed. "As Munger always said, 'All I want to know is where I'm going to die so I'll never go there.'"

Porter and I spent the next hour discussing various case studies for the book, including Buffett's initial decision to buy Berkshire, a dying textile mill that was a classic value trap, which he escaped (thanks in part to Munger's counsel) by diversifying into better businesses before it was too late.

Another chapter will surely be Buffett's ill-fated decision to buy IBM (IBM), a melting ice cube in the tech sector. But eventually, he recognized his mistake, exited, and switched horses to Apple (AAPL), which may well be the single most profitable stock investment in history.

I don't know when Porter and I will find the time to write the book – I know a book on Buffett is an idea he has been kicking around for a long time.

But we both know the subject intimately and are fast writers, so maybe we'll surprise you (but no promises!)...

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.