Who doesn’t know the saying to buy stocks when sentiment is bad? Anti-cyclical investing with the goal to fetch potential turnarounds near the bottom can be quite lucrative. The stock of Boeing has experienced a gigantic rollercoaster ride over the last decade. With the current quality issues likely somehow solvable and Boeing being a company in a duopoly plus of national security, it could be tempting to speculate on a steep climb back up.

Summary and key takeaways from today’s Weekly
– After other industry heavyweights like GE or Rolls-Royce made great comebacks, I am looking at Boeing, checking whether it could be the next in line.
– Assuming the current quality issues are brought under control again.
– However, it does not seem that Boeing’s stock is dramatically cheap.

Boeing‘s (ISIN: US0970231058, Ticker: BA) stock is up only 34% over the last ten years, not counting dividends which were paid until 2020 and then scrapped.

That’s not much with a CAGR (yearly return) of just exactly 3.0%.

Arch-rival Airbus (ISIN: NL0000235190, Ticker: AIR) in comparison has done dramatically better. Not only is the stock up more than threefold (also pre-dividends) over the same timeframe, it also is sitting not far away from its all-time high it made a couple of months ago. Airbus also not only reinstated its dividend in the meantime, it even pays a record distribution per share.

Both companies have been operating in a quasi-duopoly ever since.

Boeing is the troubled and hated market leader measured by sales.

Even though there are efforts from China building its own presence via Commercial Aircraft Corporation of China, Ltd. (COMAC; see here), it is doubtful whether they will catch up to Boeing and Airbus, at least for the time being and regarding Western countries.

I do not want to underestimate what China can achieve, but my assumption for now is that they will mainly roll out their planes domestically and to selected partners.

One thing is political ties, the other though service contracts and long standing relationships. This does not mean they will never break, but it likely would take time. My guess is, most of the big airlines, though, for now are preferably to remain customers of Boeing and Airbus.

This led me to the question whether the stock of Boeing could be ripe for a turnaround in the short- to medium-term as there always comes a time when everything bad is priced in and the market starts to anticipate a fresh new restart.

Does Boeing have the potential and an interesting enough setup?

Let’s have a look at Boeing and its stock.

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Up, down – and up again?

Do you remember?

Other hated and almost forgotten industrial icons like

• General Electric (now officially “GE Aerospace”; ISIN: US3696043013, Ticker: GE)
• or Rolls-Royce (ISIN: GB00B63H8491, Ticker: RR.)

made it from the ashes to shine again.

In my weekly about dividend cuts (see here), I briefly featured both, even though in a different context. GE Aerospace and Rolls-Royce cut their dividends to keep the urgently needed means on the too highly levered balance sheets.

Boeing also cut its dividend in 2020. Since then, it has not been reinstated.

However, new problems have arisen. Quality and safety issues made for big headline news and forced Boeing to dial down the production of its 737 model to get things under control again after a 737 MAX lost a door panel shortly after takeoff, forcing an emergency landing.

As history has shown, most issues of such dimensions sooner or later get resolved if the problem is taken by the root cause.

There are fresh headlines that Boeing may have not fully cooperated and tried to once and for all clean up the core issues. However, for a survival of the company respectively in order to gain back the lost trust (preventing customers from switching to Airbus), it sooner or later needs to get things under control again.

This is my assumption for this analysis. Otherwise we could already cancel it here.

When improvements of the situation are on the horizon, the affected stocks usually have made decent runs already after a seemingly hopeless situation marked the bottom. Assuming those issues are handled:

Is Boeing the next industry heavyweight to reemerge?

We can see below on the chart that Boeing outperformed Airbus up until 2019, but then especially starting from 2021 lost and never regained its lead.

The final bent down are the latest issues Boeing suffered from.

Just looking since the start of this year, Boeing’s stock is down by 31%!

While Airbus has wind under its wings and a clean balance sheet even with net cash, it has flown too high for my taste with an expected free cash flow yield of less than 4%. Such situations are interesting in bad times, not when everything seems rosy.

Also, Airbus has almost always had lower margins compared to Boeing – at least during times when Boeing was not troubled and interestingly also in the year 2023.

The thing is, Boeing is currently burning cash, mainly due to the fact that it cannot deliver its planes, while working capital has built – the cash has been spent on parts, but it currently cannot be converted back.

Q1 2024 results were as expected – and also previously warned by the management – extremely weak. Boeing posted operating and net losses while 3.3 bn. USD have been burnt in operating activities.

Free cash flow was even a negative 3.9 bn. USD.

Reads like a potential high in bad sentiment, respectively a bottom, doesn’t it?

Maybe “burnt” is the wrong word, because Boeing usually is a profitable company and as said the cash went mainly for a higher inventory. But this does not change the fact that at some point cash needs to be generated.

And this is where my doubts arise.

The reason is Boeing’s huge debt load and the now high interest rates which make new debt issuances way more costly, thus hurting cash flows even more.

Below, we can see that:

• Boeing had net cash until about 2017
• since then, net debt has exploded
• cash flows first were strong, then during 2019-2021 they were deeply in the red, especially in 2020

It the two fiscal years 2019 and 2020, Boeing issued 72 bn. USD in gross debt.

In their best year, 2018, they had a free cash flow of 13.6 bn. USD. In all other years, except 2017, free cash flow did not reach even 8 bn. USD.

This was a hefty issuance of debt, even though with long maturities!

The only good thing here is that Boeing did not dilute shareholders through an equity raise at the bottom. However, the stock is held back now due to the big debt load.

When times were good for Boeing – and its stock high – management was pretty generous.

Not only did Boeing pay a lucrative dividend, it also very aggressively repurchased its own stock, hunting it almost all the way up to its all-time high.

At some point, this was done also using debt – poor capital management.

The situation now is that in the near-term, luckily no huge debt obligations are due.

Boeing repaid more than 4 bn. USD during Q1 from cash on hand. Remaining cash of almost 7 bn. USD should be enough to get through the year, assuming no further unexpected negative surprises.

But then, looking into the annual report, we can see that in 2026 10.1 bn. USD are due. This is pretty much and unlikely to be fully repaid.

So, Boeing will need to refinance it, increasing interest payments significantly, as this bond has only a coupon of 1.2%. A new bond likely won’t be issued below 6% or even 7%, depending on the maturity and the market willing to accept it.

Interest expenses have come down a bit since their peak of 2.7 bn. USD, but Boeing still has yearly interest expenses of 2.4 bn. USD currently.

One argument I heard is that Boeing will be rescued by the government if needed.

While likely true regarding new orders, the fact of the matter is that currently Boeing is loss-making with its government orders, too – which even for me was a bit surprising, because I thought they would be more generous with tax-payer’s money.

Admittedly, in better years like 2018 or 2017, operating margins from the defense unit were of course positive, but this is the weakest segment Boeing has.

^{source: Boeing 2018 annual results press release (see here)}

Basically, the situation is that Boeing earns the most money with its services a strong double-digit operating margin of currently 17%.

Government orders make up 60 bn. USD of the whole backlog of 520 bn. USD. But they are without a doubt a drag on overall results, so I would not bet on them to bail Boeing out if needed. Plus, whenever government is involved, shareholder interest will not have the highest priority, so it is not likely the stock will surge again, solely on such a scenario.

I want to go even a step further.

The best strategy from my point of view would be to spin off or sell the defense segment entirely to strengthen the liquidity position. But I do not expect that to happen.

What I am rather expecting is that at some point Boeing will even benefit from investments in defense ETFs or direct investments into Boeing stock on the premise of increasing defense expenditures by governments.

However, this is not a scenario I want to form an investment thesis on.

Boeing is for me not investible due to its defense sector. But, I want to nonetheless value it.

Of the enterprise value of about 160 bn. USD (incl. pension liabilities), the equity portion of Boeing is only 109 bn. USD. The question now is what multiple is possible when the current issues are dealt with?

Huge debt loads can make an expensive company look cheaper than it is – if one only looks at the market capitalization.

Below, we can see the development of the enterprise value of Boeing – the market cap plus net debt (however without pension deficits of of 8.5 bn. USD which should be added).

The first observation here is that Boeing’s stock does not look rock bottom cheap, as it seems to be trading somewhere in the middle of the last ten years.

The debt load clearly has kept up the enterprise value.

One of my big learnings of the last years is definitely that highly indebted companies often trade for a discount for a reason. Or in other words, what looks like a discount on an equity basis, indeed is not really cheap if you add the debt.

My first thought seeing the chart above was that Boeing would need to fall by another third in enterprise value (back the envelope, that’s a drop of 50% of the stock! as a target of 100 bn. EV – 50 bn. net debt = 50 bn. equity value compared to the current market cap of 110 bn. USD) to maybe look truly beaten down.

But let’s try to value it as is with multiples.

In the past, Boeing had free cash flow margins of 7–13%.

So, on more normalized sales assumptions of 90–100 bn. USD Boeing had in the past (currently 76 bn. USD) and a range of 7–13% for FCF margins, Boeing should be able to generate 7–12 bn. USD p.a.

However, this is an enterprise value of 13–23x.

Definitely not rock-bottom which would be maybe below 10x.

The range above is way more I would be willing to pay for such a company – assuming it’d be investible for me. The issue is clearly the debt load. Net debt of 50 bn. USD under normal circumstances will likely keep the company down until the balance sheet is meaningfully delevered again. Or in the case of a gigantic wave of new orders, but that’s unlikely now.

As free cash flows are highly swinging back and forth, maybe a better proxy here is enterprise value to sales, however free cash flow needs to be firm in all cases. Here we can see that although Boeing’s stock is rather low, its valuation factually is not, confirming what we saw above.

In the past, bottoms could have been found around or even below 1x sales.

The stock is trading around 2x.

As hard and unrealistic as it may sound at the moment, another 30% to even 50% drop would be entirely justifiable, especially should new or more quality and safety issues come to the surface or in case Airbus wins more business from otherwise Boeing’s customers.

All in all, Boeing’s stock is under no viewpoint interesting for me.

Conclusion

After other industry heavyweights like GE or Rolls-Royce made great comebacks, I am looking at Boeing, checking whether it could be the next in line.

Assuming the current quality issues are brought under control again.

However, it does not seem that Boeing’s stock is dramatically cheap.

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