Why you should still beware bottom-fishing with Boeing

Aircraft manufacturer Boeing (BA) is in the news again – and, once again, for all of the wrong reasons...

This time, it's layoffs, a delay for the launch of a new plane, and big write-offs. This Wall Street Journal article from late last week has more details: Boeing to Cut 10% of Workers Amid Strike, Delay New 777X Production. Excerpt:

Boeing will cut 10% of its global workforce, or roughly 17,000 jobs, and warned of deeper losses in its operations as a machinist strike compounds problems brewing at the jet maker for years.

Along with the job cuts, the manufacturing giant said it would further delay the launch of a new airplane, the 777X, that is already years behind schedule. It will also discontinue the 767 cargo plane.

Boeing will book $3 billion of pretax charges tied to the two jet programs and another $2 billion in write-offs tied to several troubled programs in its defense unit. The charges will result in a quarterly net loss of roughly $6 billion.

They are the biggest moves so far by Chief Executive Kelly Ortberg, who took over the company in August, to revamp an American company that has struggled with production issues and been burning through its cash.

The stock hit a 52-week low yesterday and is down a staggering 43% this year.

I've previously warned my readers to avoid Boeing many times this year, most recently on May 24. Since then, the stock has fallen 15% while the S&P 500 Index is up 10%:

All this might have some investors thinking the bottom has to be in – or at least close – and that maybe it's finally time to go bottom-fishing to bet on a turnaround.

After all, as I said back in May:

Boeing is one of only two manufacturers (along with Airbus) of large passenger aircraft, for which there is so much demand that backlogs are currently more than a decade for both companies. This is a great business, so by all rights Boeing should be minting money.

In previous e-mails discussing Boeing, I've looked at mostly "soft" factors like how bean-counting managers wrecked the company's engineering- and safety-driven culture and engaged in financial engineering to boost the share price (and their own compensation) via excessive cost cuts and share repurchases.

This worked for five years... but it has all come crashing down over the past half-decade, as you can see in this 20-year stock chart:

Today, I'll explain why I'm still cautious on Boeing by focusing on the numbers – with my usual 20-year look at the financial statements.

As always, I start with revenue and net income. Here's what they look like for Boeing over this period:

As you can see, the company was doing well until its 737 MAX aircraft had two fatal crashes: Lion Air Flight 610 in October 2018 and Ethiopian Airlines Flight 302 in March 2019. Following the second crash, the U.S. Federal Aviation Administration ("FAA") grounded the plane... which hammered Boeing's revenue and profits.

Then things got much worse when the pandemic hit and commercial aviation ground nearly to a halt for many months in 2020.

Since then, Boeing's revenues have recovered somewhat, thanks in part to the FAA lifting the 737 MAX grounding order in late 2020... but the company has yet to return to profitability despite surging demand for its aircraft.

Boeing suffered another setback when Alaska Airlines Flight 1282 suffered a mid-flight blowout of a door plug filling an unused emergency exit of the aircraft on January 5, 2024. The FAA immediately grounded 171 Boeing 737 MAX 9s with a similar configuration for inspections. The order was lifted a few weeks later, but the damage to Boeing's reputation was substantial.

Turning to the cash-flow statement, let's look at Boeing's cash from operations, capital expenditures ("capex"), and free cash flow ("FCF"):

As you can see, Boeing was once an FCF machine... but that completely reversed after 2018.

So let's take a closer look at cash flows by quarter since then:

After the hideous losses due to the 737 MAX crashes and subsequent fallout, followed by the pandemic, Boeing's FCF actually turned positive for most of 2022 and 2023 – which is why the stock more than doubled – but so far this year, it has been a shocking negative $8.3 billion.

Not surprisingly, net debt has skyrocketed and currently sits at $45.3 billion. Take a look:

In light of Boeing's increasingly precarious financial situation, I wasn't surprised to see this news in the WSJ this morning: Boeing to Sell at Least $10 Billion in Shares to Plug Cash Drain. Excerpt:

Boeing is moving to raise at least $10 billion by selling new shares in a bid to stabilize its increasingly precarious finances.

The jet maker, in a pair of regulatory filings on Tuesday, told investors it could issue up to $25 billion in shares or debt during the next three years while also entering into a new credit agreement with lenders.

Under the shelf registration, Boeing is expected to pursue a stock offering that raises around $10 billion, according to people familiar with the matter.

A strike by Boeing's largest union is exacerbating financial woes at the jet maker, which last turned a profit in 2018. Its operations had been burning through about $1 billion a month before the strike.

Boeing ended September with $10.3 billion in cash and securities, close to the minimum amount the company has said it needs to operate.

This is clearly the right move by Boeing to stave off financial distress, but I'm surprised the stock isn't selling off hard today because shareholders are being diluted – and reminded of how bad the situation is at the company.

"But..." one might argue, "maybe this means that all the bad news is now out and investor expectations are so low that the stock has finally hit a bottom and is ready to rally."

I would be open to this argument if the valuation were compelling, so let's take a look...

As of yesterday's close, Boeing's $137 billion enterprise value ("EV") – $92 billion market cap plus roughly $45 billion of net debt – was equal to 1.9 times trailing revenue of $73.6 billion and 77.1 times trailing earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which is especially high because EBITDA is so depressed. (It has no price-to-earnings multiple since earnings are negative.)

If we look at Boeing's EV-to-revenue multiple over the past two decades, we can see that the stock consistently traded at around 1 times for the first dozen years through 2016, so the fact that it has fallen from a peak of 3.4 times to 1.9 times today doesn't make me think it's cheap.

One could argue that revenues are currently depressed at $74 billion... but even if we assume they quickly rebounded to their former peak of $101 billion, the stock's EV-to-revenue multiple would still be 1.4 times – that's 40% above the long-term average prior to all of the financial engineering that destroyed this once-great company.

In conclusion, Boeing is still an easy pass.

It's possible that the recent bad news is part of a classic "kitchen sink" quarter in which the new CEO is setting investors' expectations (and the share price at which his stock options are struck) as low as possible.

But Boeing still has too much debt and is burning too much cash – not to mention a half-dozen other major issues like FAA scrutiny and the machinists' strike – which makes me think this stock is likely to be a value trap.

As I wrote on May 24:

... it took more than two decades to bring this once-great company to its knees. I think it's going to take years, not months, to fix it... so I would remain on the sidelines for now instead of trying to bottom-fish the stock today.

I feel the same way now... Don't fall into the bottom-fishing trap at these levels.

Best regards,

Whitney

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