Boeing (BA 1.51%) stands out in the aerospace sector. While many stocks in the sector have outperformed the market in 2022, and a few (Raytheon Technologies, AAR Corp, and Hexcel) are actually in positive territory, Boeing stock is down a whopping 36% in 2022, and 48% over the last year. So what's going on? And is the dip a buying opportunity? Here's the lowdown.
Data by YCharts
What went wrong
There's little doubt that the problems at Boeing are a combination of the general market plus its own execution problems. Unfortunately, the latter are many. If it isn't multi-billion dollar cost overruns and charges with Boeing's defense business, it's significant operational and regulatory issues across all its major commercial aircraft.
The 737 MAX is supposed to be the narrow-body workhorse of the skies alongside the Airbus A320 NEO family. However, the aircraft's grounding following some high-profile crashes damaged confidence, and now Boeing is struggling to ramp production to deliver its backlog. Worse, it's come under criticism from leading figures in the industry (Ryanair's CEO Michael O'Leary and giant leasing company Avolon CEO Domhnal Slattery) over its leadership and its failure to deliver aircraft on time.
Meanwhile, on the wide-body side of the business -- where Boeing is often seen as having the edge over Airbus -- continued pushouts of the initial delivery date of the Boeing 777X (a plane seen as leading a wide-body replacement cycle) and the regulatory halt on deliveries of the 787 continue to dog the aviation giant. If all that wasn't bad enough, Boeing's ballooning debt and dwindling cash flow suggest the company might need to raise more cash in the future.
Data by YCharts
The case for buying Boeing stock
With all that bad news out of the way, it may seem surprising to hear that there is a powerful case for buying the stock. Much of it depends on many of the factors that have long supported the company in the past:
- Boeing is still one of only two major aircraft manufacturers capable of competing across the full spectrum of the market, and Airbus also has challenges in ramping production rates.
- The company still has a huge backlog, including 3,365 Boeing 737 family aircraft, 405 Boeing 787 aircraft, and 227 Boeing 777X aircraft.
- Demand for commercial air travel has returned strongly in 2022, and the industry is undergoing a multi-year recovery.
- Many of Boeing's problems are self-inflicted, implying that the stock could outperform if and when management sorts out its execution and regulatory difficulties.
In short, the end market remains favorable, and if the company can end the seemingly endless run of multi-billion dollar charges and regulatory issues, then better days lay ahead. What Boeing needs to do now is get down to ramping production rates on the 737 aircraft while incrementally working on the traditional margin expansion that usually occurs as production increases. Meanwhile, getting clearance to resume 787 deliveries will be a significant plus, and moving toward executing on the new first delivery date (2025) for the 777X will reassure investors.
The upside is significant if Boeing can do all of these things. After all, the market cap is just $77.6 billion for a company that delivered $13.6 billion in 2018 -- before the 737 MAX grounding and COVID-19. Getting back to anything close would make the stock look like a great value. As such, the case for Boeing stock is based on a "self-help" story -- no bad thing in an uncertain economic environment.
That said, there's still downside risk if Boeing carries on taking charges and bleeding cash. A failure to execute could lead to a need to raise debt in a rising interest rate environment or sell equity when the share price is low.
A stock to buy?
If you can't tolerate significant near-term risk, the answer will be "no." Similarly, for investors who only want to invest in high-quality companies with discernible track records of execution, it's also a "no." Moreover, there are plenty of other ways to invest in the aerospace sector. With all that said, Boeing's upside potential is significant, and if the company can start to demonstrate it's on top of its issues, then long-term value investors may want to take a nibble at these levels.
