After plunging nearly 8% in response to worse-than-expected (really? how was that possible?) earnings news Wednesday, shares of aerospace giant Boeing (NYSE: BA ) have recovered most of those losses after going up yesterday.
Such seesawing sentiment on Wall Street begs the question: Were investors right Wednesday, when they sold the shares off? Or yesterday, when they bought the shares back?
Think long term
To my mind, the answer to that question depends on one thing: Will the ongoing strike at Boeing permanently cripple the company?
You see, by every valuation metric I test, Boeing looks like an out-and-out bargain at today's prices. I mean, seriously folks -- around 8 times earnings? For Boeing? Are you kidding me?
Meanwhile, I know how everyone says Boeing is losing $100 million a day on this strike. But really, it isn't. At worst, it's postponing $100 million in sales every day. So far, Boeing has received very few 787 order cancellations. So demand for the new wonder plane remains high. The sales will still come through ... eventually.
The real risk
The real risk here is that the union can carry out its threat to bleed Boeing dry over the course of its strike. Here's how International Association of Machinists (IAM) union president Tom Buffenbarger (his real name) framed the threat. Arguing that Boeing has $10 billion in "ready cash," Buffenbarger figured: "Let's see ... Most analysts peg the [Boeing revenue] loss at $100 million a day, so that's about three months and a week to them."
In essence, IAM's read on the situation is that Boeing is also burning through its cash reserves at $100 million per day. On its face, that seems absurd.
For one thing, not building planes means not buying parts for planes that are not being built. We know this is happening because Boeing suppliers -- everyone from Honeywell (NYSE: HON ) and United Technologies (NYSE: UTX ) to Spirit AeroSystems (NYSE: SPR ) and BE Aerospace (Nasdaq: BEAV ) -- are affected by the strike.
Goodrich (NYSE: GR ) cut its annual sales guidance yesterday, blaming the strike. CFM International -- jointly owned by General Electric (NYSE: GE ) and France's Safran -- may have already lost $100 million in revenue because of the strike.
Not building planes also means not powering up idled assembly lines, and not paying the workers who are out on the picket line. According to Boeing, the new proposed contract would have an average wage of $65,000 per year, times 27,000 strikers, that alone should shave around $5 million per day from payroll.
To my mind, all of this suggests that Boeing could be "losing" a lot less revenue than IAM thinks. But that's just a guess. Let's quality-check it with a few numbers from Boeing's report.
Boeing's treasure chest
At first glance, it actually looks like IAM is right on the money. According to Boeing's press release, cash and marketable securities levels have declined from $10.2 billion at the end of last year's Q2, to $7.2 billion on Sept. 30. That $3 billion decline looks to be just what IAM was predicting would happen over 25 days of striking. In which case, Boeing could well have only "three months and a week" til its treasure chest runs dry.
And yet, Boeing explains, the decline in cash levels was due only in part to the strike. Also at play were: "787 inventory growth, strike impacts and previously announced business acquisitions ... $589 million in scheduled repayments of BCC debt ... [share repurchases totaling] $519 million and paying $295 million in dividends." To me, that sounds like the strike per se burnt a whole lot less than "$100 million per day." Why might that be?
Before drawing conclusions, check your assumptions
Working a few back-of-the-envelope numbers, we know that Boeing suffered through 25 strike days last quarter -- from Sept. 6 through quarter's end on Sept. 30. We also know that revenues at Boeing's commercial airplanes division declined $1.3 billion in comparison to last year's Q3. That works out to about $52 million per day. And according to Boeing, even this decline was due only in part to the strike. Said Boeing: "Supplier production problems also contributed to the decline in revenue."
Even if you discount management's explanation as biased toward downplaying the strike's effectiveness, the evidence suggests that the strike is hurting revenues only about half as badly as IAM had hoped.
Listen, I'm not saying that the strike is a good thing. (Oh, wait. I guess I did say that.) But whether you think the strike is good or bad for Boeing, one thing seems certain: It's going to take IAM a lot longer than it thinks to bleed Boeing dry. Maybe too long for the union to hold out.
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