Please ensure Javascript is enabled for purposes of website accessibility

With Coronavirus Fears and Bailout Rumors Looming, Should You Buy or Sell Boeing Stock Right Now?

By Adam Levine-Weinberg - Updated Mar 20, 2020 at 5:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares have plunged 70% over the past month, but between a crushing debt load and a sizable multiyear reduction in new aircraft demand, investors should still stay away.

The global aviation business is screeching to a halt in the midst of the COVID-19 pandemic. Even airlines that are usually top performers have seen revenue drop toward zero and are on track to burn through cash at an alarming rate over the next few months.

This couldn't have come at a worse time for Boeing (BA -1.25%). The U.S. aerospace giant's top-selling product, the Boeing 737 MAX, has been grounded for more than a year due to safety problems. As a result, the company's debt load was already elevated and cash flow was negative prior to the latest crisis. Several other key products have also encountered technical issues. Not surprisingly, Boeing stock has plunged, recently dipping below $100, down from around $340 just a month ago.

BA Chart

Boeing Stock Performance, data by YCharts.

Yet as far as Boeing stock has fallen, investors should still avoid the shares. The government is likely to provide loans and/or loan guarantees to prevent Boeing and its suppliers from collapsing, but that aid will saddle the company with a massive amount of debt. Meanwhile, it could take years for demand for Boeing's commercial jets to recover, leading to an extended period of weak free cash flow.

Boeing was already in bad shape

The 737 MAX grounding, which followed two fatal crashes for that new model, devastated earnings and cash flow last year. For the full year, Boeing posted a core operating loss of $3.4 billion and burned $4.3 billion of cash.

Despite free cash flow turning negative, the aerospace giant continued to pay over $1 billion in dividends each quarter during 2019. This temporarily supported Boeing stock, but it exacerbated the pressure on the company's balance sheet. By the end of the year, it had $27.3 billion in debt, compared with just $10 billion in cash. For comparison, Boeing entered 2019 with only $13.8 billion in debt, offset by $8.6 billion in cash.

Even before the COVID-19 pandemic exploded, Boeing was expecting to burn even more cash in 2020 than it did last year. For one thing, it has had to offer financial support to some suppliers after pausing all 737 MAX production. Additionally, the production halt means that it is no longer receiving much in the way of advance payments from 737 MAX customers. Lastly, Boeing has projected that cash compensation for airlines affected by the 737 MAX grounding would increase this year.

A Boeing 737 MAX 9 flying over clouds

The 737 MAX grounding has severely hurt Boeing's finances. Image source: Boeing.

While the 737 MAX represented Boeing's biggest challenge by far in 2019, it wasn't the only problem for the company. The first flight of the 777X was delayed due to engine durability issues; the KC-46 military tanker isn't meeting specifications, driving continued cost overruns; and the Starliner spacecraft's uncrewed test flight went awry, which may force Boeing to operate a second uncrewed test flight at its own expense.

To help navigate all of its cash flow challenges, Boeing arranged a $13.8 billion term loan earlier this year, which it has now drawn down in its entirety. That puts its debt load above $40 billion today.

The outlook just got much worse

Unfortunately, the COVID-19 pandemic has dramatically multiplied Boeing's problems. In the short term, air traffic is plunging, forcing airlines to make unprecedented service cuts. In Europe, Ryanair (incidentally, one of the biggest 737 MAX customers) is slashing flights by more than 80% as of next week. Here in the U.S., Delta Air Lines recently announced that it will park more than half its fleet and reduce capacity by about 70% until demand recovers.

Similar decisions are being made by airlines around the globe. In short, nobody needs new aircraft right now. Airlines are pulling all of the contractual levers they have to cancel or defer aircraft deliveries in order to preserve cash.

That's bad news for both Boeing and its European rival Airbus (EADSY 1.08%). But it's a much bigger problem for Boeing. Many airlines' contracts with Boeing allow them to cancel orders for individual aircraft penalty-free if the deliveries are delayed by more than six months or a year. Many 737 MAX jets have already reached that point or soon will. As a result, Boeing is likely to face a bigger near-term cancellation wave than Airbus.

A United Airlines Boeing 737 on a runway

Boeing could face a wave of order cancellations this year, especially for the 737 MAX. Image source: United Airlines.

Looking out a little further, airlines expect the impact of COVID-19 on global air travel to linger beyond 2020. Until the pandemic is definitively stamped out, many would-be travelers will hesitate to fly. Moreover, even if researchers find an effective vaccine, ending the pandemic, the near-term disruption could drive numerous smaller, financially weak airlines out of business.

As passenger traffic returns over time, other airlines will backfill the capacity lost from those that fold. But for the next few years, there could be a glut of cheap used aircraft on the market. Additionally, whereas Airbus previously had few A320neo delivery spots available prior to 2024, order deferrals and cancellations are likely to open up near-term A320neo availability. Both factors will undermine demand for the 737 MAX (and other Boeing models, to a lesser extent).

As bad as the 737 MAX situation was a few months ago, Boeing stock was supported by the fact that Airbus couldn't supply the whole market by itself. That gave airlines with near-term narrow-body aircraft needs no real alternative to the 737 MAX. With global demand for new aircraft plunging and not likely to fully recover for years, Boeing may have to drastically scale back its production plans for the 737 MAX, its key cash cow.

Boeing's main wide-body aircraft families -- the 787 and 777 -- were already struggling with thin order backlogs prior to the COVID-19 pandemic. Sharp production cuts for those models also may be necessary, further eroding Boeing's cash flow potential over the next few years.

Don't buy Boeing stock hoping for a bailout

Boeing is asking the federal government for $60 billion in loans and loan guarantees for the U.S. aerospace industry (including both Boeing and its suppliers). The Trump Administration appears to be supportive of this request, which isn't surprising, given that the aerospace industry supports over 2 million jobs.

But while this bailout may keep Boeing alive, the government isn't likely to give the company free money. The loans will eventually have to be paid back, and its annual free cash flow over the next five years is likely to be a fraction of the $13.6 billion it generated in 2018, due to the glut of used jets and downturn in aircraft demand discussed above.

As a result, I expect Boeing to suspend its dividend imminently, and it could remain suspended (or limited to a token payout) for five years or more. Even if the 737 MAX is recertified later this year and the industry starts to recover in 2021, Boeing will need to devote all of its limited free cash flow to debt reduction for many years to come.

Despite the stock's plunge over the past month, the company still carries a $57 billion market cap. With Boeing likely to exit the COVID-19 crisis with a massive debt load and greatly diminished free cash flow, even this valuation may be too generous. Thus, investors should avoid the stock for the foreseeable future: There's no recovery in sight.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
BA
$136.72 (-1.25%) $-1.73
Airbus Stock Quote
Airbus
EADSY
$24.29 (1.08%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.