Should Investors Consider Buying Boeing Shares? A Detailed Analysis of Current Options
Investors may be contemplating the opportunity to purchase shares in Boeing amidst one of the largest equity raises recorded. However, the company faces significant challenges as it strives to stabilize its financial standing and avert a potential downgrade of its debt to junk status.
Boeing, which has a long history spanning 108 years in manufacturing aircraft, rockets, and missiles, has seen its market value plummet by over 50% in the last five years. Many critics argue that the issues haunting Boeing stem from decades of prioritizing financial strategies over core aerospace innovation.
This short-term profit mentality has reportedly led to insufficient focus on quality improvements and innovation, according to industry experts.
For instance, the latest equity raise has halted the decline in the number of Boeing shares, which had been reduced significantly due to substantial buyback programs executed between 2013 and 2019. During this period, Boeing repurchased more than $40 billion in shares, averaging around $172 each, which drastically increased its long-term debt from $10.7 billion in 2018 to $53.2 billion by the end of the most recent quarter. The current share issuance is priced at $143.
While shareholders benefited from substantial cash returns during those years, Boeing has faced various scandals, fatal incidents, and operational setbacks. Notable issues include a door panel detachment on a 737 Max in mid-flight in January, the mishap with its Starliner space capsule leaving astronauts stranded in June, and a halt in production by its largest union in September, compounding the financial challenges facing the company as debt levels approach junk rating.
Understanding Boeing’s Revenue Model
Currently, Boeing is not generating profits, having reported losses since 2018.
Boeing and Airbus, which are the dominant players in the commercial aircraft market, had Boeing earn $33.9 billion last year from commercial aircraft sales, alongside $24.9 billion from its defense, space, and security sector, and $19.1 billion from its services segment. However, both the commercial and defense segments are operating at a loss, highlighted by ongoing production difficulties.
A primary issue lies in Boeing’s inability to manufacture enough aircraft to cover its increasing fixed costs. Regulatory demands following quality issues have necessitated a slower production rate, further inhibiting the company’s cash flow.
In a significant labor dispute, 33,000 Boeing employees in Washington state went on strike in September after the rejection of a new contract by the union, effectively halting the production of key aircraft models like the 767 and 777, which has exacerbated sales challenges.
Boeing’s Financial Challenges
Boeing is experiencing substantial cash outflows and is facing difficulties meeting its debt obligations. In the last quarter, the company recorded a free cash outflow of $1.3 billion, leaving them with a gross cash reserve of $10.5 billion, just above the critical threshold of $10 billion needed for daily operations.
The major credit rating agencies, including S&P, Moody’s, and Fitch, categorize Boeing’s credit rating as one tier above junk status, indicating a heightened risk of default. Potential downgrades could trigger increased interest costs, estimated to rise by approximately $200 million, totaling around $2.9 billion annually.
Outlook for Boeing
Boeing claims to have a backlog exceeding 5,400 commercial aircraft orders, valued at over $500 billion. However, deliveries have been delayed due to several previous issues including the grounding of the 737 Max, the impact of the pandemic, and supplier delays.
This backlog provides some visibility toward revenue prospects equivalent to about six years of sales. Analysts project a potential recovery in earnings by 2027, forecasting earnings per share around $6.98, which would reflect levels similar to 2016. However, Boeing’s past struggles with meeting delivery timelines cast doubt on these optimistic forecasts.
The company may explore divestitures; reports suggest Boeing could be considering selling parts of its space division, with estimates of earning between $1.2 billion and $1.3 billion from potential sales connected to NASA ventures. This figure does not account for Boeing’s military space programs or its substantial joint ventures.
Analysts predict Boeing could face a staggering pre-tax loss of $9.2 billion by the end of the fiscal year. With ongoing complications surrounding the 737 Max and 787 aircraft, the likelihood of announcing new projects before 2025 appears slim.
Despite these challenges, the investment community maintains cautious optimism, with 53% of analysts rating Boeing shares as a buy, suggesting that the new equity offerings could enhance cash flow and improve supply chain dynamics in the future.
As Boeing progresses through an anticipated four to five-year order cycle, demand for its narrowbody planes remains solid. However, the risks associated with production timelines and competition with Airbus, coupled with the imperative of balancing its books, imply that refraining from investment in Boeing may be prudent at this juncture.
Advice: Avoid Investing. Reasons include a long and precarious recovery path ahead.
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