It's been a tough month for investors, and aerospace stocks have offered little refuge from the overall market slump. The global COVID-19 pandemic has caused economic activity to grind to a halt, disrupting supply chains and raising fears of a recession.
Shares of Boeing (BA +2.50%) and General Dynamics (GD 1.04%) have been caught up in the sell-off, offering much more attractive buy-in prices than investors could have gotten three months ago. But given the uncertainty in the markets, is either company really a buy?
Here's a look at both Boeing and General Dynamics to determine whether investors should be considering adding either of these stocks to their portfolio right now.
Boeing can't seem to fly straight
Boeing was flying through turbulence even before the pandemic, weighed down by the fatal crashes and subsequent grounding of the 737 MAX airplane. The investigations that followed led to a number of embarrassing revelations about Boeing's culture, eventually leading to an overhaul of top management late in 2019.
The company's difficult situation has only gotten worse in recent months. Through all of the 737 MAX issues, Boeing bulls were able to take comfort in the plane's impressive 4,300-plus strong order backlog and the airline industry's seemingly insatiable demand for new planes.
Image source: Boeing.
The pandemic has changed everything. Large airlines are grounding more than half their fleets, and talking of deferring new plane orders. The global aviation industry is expected to see revenue decline by more than $100 billion in 2020, leading to questions about the viability of the industry.
Boeing had already seen weakness in the market for larger, wide body aircraft prior to the latest downturn, planning to bring down production rates on its 787 Dreamliner in 2021. Now, the company and its investors must grapple with the threat that overall new plane demand could plummet in 2020, and perhaps into 2021.
Boeing reported negative net orders in February, with 46 cancellations and only 18 gross orders.
The company is seeking upwards of $60 billion in government aid to support its business and its supply chain. Investors have hit the panic button, sending Boeing shares down nearly 70% year to date.
Boeing does have a major defense business to fall back on, which should hold up better in the event of a full-fledged recession, but these are dangerous times for a company that has relied on commercial success to generate a more than 500% stock return during a 10 year period which ended last year.
General Dynamics' Gulfstream could remain grounded
Shares of General Dynamics have held up rather well, by comparison, "only" down 33% so far in 2020. Broadly speaking, defense-focused companies should hold up better in a downturn than companies relying on commercial customers.
Defense companies have said they expect procurement to slow while government employees work from home or are distracted by the pandemic response, and have warned they could face factory shutdowns as local jurisdictions recommend social distancing, but the need for weapons has not changed -- and the government is still a willing buyer.
Image source: General Dynamics.
General Dynamics has been an underperformer among defense stocks in recent years because of its one major commercial business: its Gulfstream business jet unit. The business jet market never recovered from the 2008-2009 recession, and seems unlikely to get a boost now as potential customers are cutting costs and battening down for a slowdown.
The company does have a solid backlog of defense contracts, including landing the largest shipbuilding contract in history in December. Its shipyards are responsible for the bulk of the nation's nuclear submarines, including the forthcoming Columbia-class ballistic missile submarine, a key cog in the U.S. military's nuclear deterrence strategy.
GD also has one of the sector's largest government IT businesses, and could benefit from the pandemic if government agencies need to upgrade their tech systems to deal with the weight of additional remote workers.
General Dynamics, like Boeing, is going to find it hard to get airborne in a recession because of expected weakness in business and consumer spending. But the company has a handful of defense contracts in their early stages that should hold firm in a downturn, and are expected to grow more lucrative over time as some of the initial costs work through the system.
And the better buy is...
Boeing shares are now more affordable than they have been in years, but that does not make them cheap. Boeing, even after the dramatic stock price decline, trades at a total enterprise value of 9.8 times EBITDA, compared to General Dynamics' 7.9 times EBITDA multiple. Both companies today trade around 8 times sales.
This could be a difficult six-month period to hold either stock, assuming the economic slowdown continues into the second half of 2020 at least. There was once reason for hope that a new generation of Gulfstream products would finally accelerate sales in 2020, fueling a General Dynamics jump higher, but that hope is fading along with the economy.
But Boeing is a mess right now, and could face a short-term liquidity crisis in the months to come, absent a bailout or a rebound in new plane deliveries. There are too many unknowns surrounding the company to make it a safe buy at any price.
Until there is more clarity about the status of the 737 MAX, more clarity on what the pandemic does to the airline business, and more clarity that new management is up to the task of undoing some of the culture issues that dragged Boeing down in 2019, I would advise staying away.
I continue to believe General Dynamics is an undervalued business that will pay off well for investors, even if that payoff is now likely to take longer than I had hoped. Despite the turbulence, General Dynamics is the better buy today.
