Charlie Munger, Warren Buffett's business partner, has condemned drugs, liquor, and leverage as humanity's three biggest downfalls. The first two are your own responsibility, but if you're invested -- or are thinking about investing -- in the aerospace industry, you should know which companies in the space are the deepest in debt.
Leverage is not inherently bad for a company. A fast-growing company can intelligently employ debt to exploit its market opportunity. At low interest rates, debt can fund shrewd strategic acquisitions. Since it's generally cheaper than equity, debt can also lower a company's cost of capital.
But too often, companies end up abusing debt -- and as Munger reminds us, excessive leverage can lead to ruin. Let's examine a few of the most heavily indebted aerospace companies.
|
Company |
Total Debt/Capital |
Interest Coverage |
|---|---|---|
|
GenCorp |
204.0% |
1.1 |
|
TransDigm Group |
84.2% |
3.4 |
|
Boeing |
81.3% |
9.1 |
|
AerCap |
74.8% |
2.1 |
|
Kratos Defense & Security Solutions |
61.3% |
1.1 |
First of all, look at GenCorp. The company has twice as much debt as actual capital, meaning its book value is negative. And with that whopping debt load, it's not surprising that the company is struggling to make its interest payments. At an interest coverage ratio of just 1.1, a mere 10% of operating income flows to equity holders.
Of the others, the one stock that jumps out at me as being different is Boeing. Boeing has a nice slug of debt -- more than $12 billion -- on its balance sheet, but it also has more than $10 billion in cash. The business also produces plenty of operating income; the 9.1 times interest coverage ratio tells us that Boeing isn't having any problems meeting its interest payments.
On top of their heavy debtloads, these companies are all trading at relatively rich multiples. AerCap is trading at 10 times EBITDA, and both TransDigm and Kratos are trading north of 16 times. Investors should make sure they do their homework before investing in these stocks.
For an easy way to stay current on any of these stocks, add them to My Watchlist:
- Add GenCorp to My Watchlist.
- Add TransDigm Group to My Watchlist.
- Add Boeing to My Watchlist.
- Add AerCap to My Watchlist.
- Add Kratos Defense & Security Solutions to My Watchlist.
