It's been a troubling year for Boeing (BA +1.45%), as the company's been forced to ground its hot-selling 737 MAX aircraft after a March incident in which an Ethiopian Airlines flight crashed, killing all 157 people on board. It was the second fatal crash for the new plane in a matter of months and started a process of discovery that has at times portrayed the aerospace giant in a negative light.
Boeing has deservedly taken a lot of heat from regulators and the press following the crashes, and the financial implications of the grounding, which could continue at least into early fall, will be substantial. But investors in the company have actually fared pretty well through the turbulence.
Boeing's 737 MAX in flight. Image source: Boeing.
On one hand, Boeing is a $100 billion-sales aerospace giant with the wherewithal to weather the crisis, and a portfolio full of other defense and commercial products, including its 787 Dreamliner, to help see it through. On the other hand, the 737 MAX tragedy is unlike past modern aviation disasters the industry has dealt with, and corporate actions and inaction leading up to the crashes appear to raise serious questions.
So what's a potential investor to think about Boeing shares right now? Here's a dive into the company's operations and outlook to try to determine whether Boeing is a buy.
The MAX is a mess
The 737 MAX remains grounded pending recertification by the FAA and foreign regulators. Boeing continues to make the plane but has temporarily reduced its production rate to 42 frames per month, down from a planned 52, and the company has worked out deals with key suppliers to avoid liquidity issues in the supply chain. It's causing some chaos at Boeing's Renton, Washington, facility where the plane is made, as the company is forced to store some planes in the employee parking lot.
Historical moment in Aviation history! ✈️
— Aviation photo ✈ (@Airplane_pic) June 23, 2019
Aerial images show the Boeing 737 MAX aircraft parked in the staff car park because there is no more capacity left at the airport. pic.twitter.com/TZ3MKH8rdM
As many as 500 737 MAX planes are being stored around the globe, at an estimated cost of about $2,000 per month per plane. There will be added expense once the grounding is complete as planes out of service for such a long period of time require thorough, and time-consuming, inspections. It seems likely Boeing will have to foot a good bit of that bill for its customers, in addition to the estimated $1 billion to $1.5 billion in airline expenses resulting from cancelled flights.
The exact costs won't be known until the 737 MAX is airborne again, but it seems unlikely the company will be able to ramp up to 52 planes per month this year. Boeing suspended guidance until it knows exactly when deliveries will resume, but even with positive cash flow from 787 deliveries and other activities, Boeing probably bled through more than $1 billion in the second quarter.
Boeing made a statement in June at the Paris Air Show when it announced a deal to sell 200 737 MAX jets to British Airways parent International Airlines Group. The deal, though probably priced at a significant discount, helps put to rest fears that airlines would shy away from the aircraft because of its issues.
The good news for long-term investors is assuming the 737 MAX deliveries do eventually resume, Boeing should see a positive cash snap back in 2020 and continue to build in 2021.
A mixed bag elsewhere
Boeing's defense and space business, though responsible for less than 25% of total company revenue, still ranks as a top five U.S. defense contractor. And the company, after an extended lull on the defense side -- including a rare public rebuke from the Pentagon that led to a management overhaul of the defense unit -- has come roaring back to life in recent quarters.
Boeing in the second half of 2018 won a trifecta of high-profile awards when it was picked for a $9.2 billion contract to build the Air Force's trainer jet, a $2 billion-plus deal to replace the UH-1N Huey helicopters, and a $805 million contract to design and build a new Navy refueling drone. In February it won a smaller, but intriguing, competition to design and build an autonomous submarine for the Navy.
Boeing needed the wins. The defense business lost to Lockheed Martin in the two important fighter competitions held this century, and a flagship platform it did win -- the Air Force's refueling tanker -- have been marred by setbacks and has led to more than $2 billion in pre-tax charges. Boeing passed a major milestone when the first tanker was finally delivered, years late, but it suffered another black eye barely a month later, when the government was forced to ground the planes after inspectors found tools and other debris left inside.
Is Boeing a buy?
For all the issues surrounding Boeing, the stock is still up 17% year to date. Granted, the shares are down since the March crash, but the resilience in the stock shows that investors continue to believe that while the 737 MAX issues were a tragedy for those involved and a setback for the company, the setback will be temporary.
History would suggest that expectation is correct, as consumers in the past have continued to fly airplane models even after fatal incidents. Given that airlines have few other options for sourcing planes, the carriers and their customers probably won't have a choice, though the prolonged nature of this review seems likely to linger longer than most incidents do and could make it more difficult for Boeing to be aggressive in sales negotiations and quickly boost profit margins on the jet.
My concern about Boeing isn't that the 737 MAX won't fly again, but rather a worry about whether CEO Dennis Muilenburg and his leadership are up to the task. The company has appeared tone-deaf at times throughout the 737 MAX grounding, and the reporting on the certification process for the jet and the company's awareness of potential issues, while incomplete, is troubling.
Meanwhile, this is also a management team that somehow let the long-troubled KC-46 tanker be delivered with debris left in the hull, adding to the company's issues with an already skeptical Pentagon. The overall perception is not of a company focused on getting the details correct.
Boeing shares remain expensive, trading at 21.6 times earnings, compared to defense leader Lockheed Martin's 18.4 multiple and commercial aerospace suppliers Honeywell International and United Technologies, both at 19.
The company's commercial franchise is a powerhouse, and its defense unit looks more promising than it has for years. I do assume Boeing will be able to ride out this storm, and if I were an existing holder, I would hold my nose and continue to own the shares.
But given the sky-high valuation and all the issues that surround Boeing, investors are better off putting new money to work elsewhere.
