Boeing (NYSE:BA) and its supply chain are getting the bailout the company's CEO said the aerospace giant didn't really need. Even so, it will help ensure the company will be able to weather the COVID-19 coronavirus pandemic without facing the risk of insolvency.
The company's shares were down more than 70% year to date earlier in the month but began rallying in recent days as the bailout plan started to take shape in Washington. Nevertheless, Boeing remains a challenged company with a suspended dividend, and management still has a lot on their plate in the months to come.
With the bailout secured, is now the time to jump in and buy Boeing shares?
The commercial aerospace cycle has turned
Boeing and Airbus enjoy a duopoly in large-airliner production, in part because the industry has a history of being highly cyclical and tied to economic growth. Commercial-plane sales have defied the boom and bust cycle for more than a decade, thanks to soaring growth for travel and the ability of healthier airlines to afford new planes. But even before the pandemic started, there were signs demand was eroding.
Even before the outbreak, the company had planned to reduce production of its 787 Dreamliner to 10 per month in 2021 from 12 per month this year. Boeing had hoped to offset that decline with more sales of its smaller 737 MAX, a much-anticipated plane that's been grounded since March 2019 after a pair of fatal crashes.
Boeing remains confident the 737 MAX will fly again in the months to come, and Boeing officially has a backlog of more than 4,300 orders. However, the airline industry has changed a lot since those orders were placed. Travel demand has all but evaporated due to the pandemic, with Delta Air Lines, for example, predicting that second-quarter revenue will fall by 80% year over year.
The airlines are responding by cutting flights and grounding aircraft. It's far from certain how long the pandemic will rage or what it will do to long-term travel demand trends. (I'm optimistic demand will return eventually.) But that's going to take time, and airline balance sheets are much more fragile than they were three months ago. It seems likely a significant portion of Boeing's order book is vulnerable to cancellations or at least deferrals.
Boeing reported negative net orders in February, with 46 cancellations and 18 gross orders. Those numbers are unlikely to reverse themselves any time soon.
A portfolio of landmines
The 737 MAX has been an economic weight on Boeing, but the embarrassing revelations about Boeing's culture that have come out of the 737 MAX investigation should be as big a concern for the company's investors. There are other long-simmering issues to consider, as well. Boeing is one of the most storied names in aviation but has lost the last two major U.S. fighter competitions to Lockheed Martin, and a significant portion of the military jets in its portfolio today came via acquisition rather than through internal development efforts.
One of Boeing's flagship military wins, the KC-46 refueling tanker, was marred with controversy from the beginning and led to Boeing's one-time chief financial officer being sentenced to jail. The KC-46 came in years behind schedule and billions over budget, leading to a rare public rebuke from Pentagon officials. When it was finally delivered, the initial airframes had to be grounded almost immediately because Air Force operators found tools and construction debris left inside.
Boeing's next commercial tentpole, the 777X, has been plagued by development delays and risks entering service as demand for large planes is waning.
This isn't to say Boeing's portfolio isn't without strengths. The company's defense business is a $25 billion-sales counterweight to a commercial aerospace slowdown. Since the KC-46 reprimand, the company has secured a series of important contract wins including 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, an $805 million contract to design and build a new Navy refueling drone, and a contract to design and build an autonomous submarine for the Navy.
Is Boeing a buy today?
Boeing is perhaps the most Jekyll and Hyde company I follow today. On one hand, it has duopoly protection in a massive commercial aerospace market that might be weak for the next few years but has fantastic long-term potential. On the other hand, it has allowed Airbus to gain market share and goodwill among customers as the 737 MAX remains grounded and the 777X stalls.
On one hand, Boeing took a much-needed step to overhaul its culture and clean up the internal mess when it fired CEO Dennis Muilenburg in December. On the other hand, Muilenburg's replacement, David Calhoun, helped oversee the company as a Boeing board member since 2009.
It's nearly impossible to imagine Boeing collapsing, and with its stock still down 44% year to date, it's certainly more affordable than it has been in some time. Yet the pandemic-related market sell-off has discounted the share price on a lot of better-run aerospace businesses with more certain outlooks.
If you buy into Boeing today, you might well catch the bottom. But you could also be stuck with a company that could take a year, if not more, to reinstate its dividend. It also faces a slow grind to reboot growth in its sprawling commercial business and still has a lot to prove in terms of restoring credibility with key constituents.
Boeing shares are down, and I see no reason to buy in right now.