Is Now the Time to Invest in Boeing?
It’s been a tough year for Boeing.
The aviation giant, which employs over 153,000 people around the globe, made headlines in October of 2018 when a Boeing 737 MAX crashed in Indonesia. The accident, which killed all 189 passengers, was deemed to have been caused by a design flaw in the plane’s Maneuvering Characteristics Augmentation System (MCAS). In March of 2019, a Boeing 737 MAX crashed in Ethiopia, killing the 157 people on board. Once again, it was determined that the MCAS led to the accident.
The two deadly crashes led to the grounding of all Boeing 737 MAX planes, which dented the company’s stock price and lowered consumer loyalty. And that, unfortunately, was only the beginning of problems that plagued the aircraft producer. Boeing was unable to meet deadlines on a contract to produce the KC-46 tanker for the U.S. Air Force; then, in December, the company’s unmanned Starliner capsule made headlines when it was unable to reach orbit to dock with the International Space Station. To make matters worse, travel shutdowns caused by COVID-19 have lowered company stock even further.
It’s an understatement to say that Boeing has merely been impacted by these events. The company has made drastic plans to reduce employment levels and trim off inefficient production lines. In late May of 2020, Boeing laid off nearly 7,000 workers, with plans to lay off 9,000 more.
All of this sounds like the company is in deep water. But as of early June, 2020, investor sentiment surrounding Boeing is positive. Stock prices are surging, leading a bull market that is rebounding with unprecedented strength. Is this merely a fluke? Or is Boeing actually returning to its original dominance, making this the perfect time to invest in the company?
A fundamental and technical analysis may provide an answer:
- Boeing (ticker symbol BA) reported a first quarter loss of $1.70 per share, which was far better than the predicted losses. To put that number in comparison, Q1 for Boeing in 2019 saw a gain of $3.16 per share.
- Revenue has seen a 6% contraction over the past three years.
- Production deliveries fell by 66% in Q1, caused by a decrease in travel and decreased labor efficiency due to COVID-19 restrictions.
- Operating cash flow was negative $4.3 billion in Q1, and debt grew from $27.3 billion to $38.9 billion.
- In March of 2020, Boeing supported a $60 billion loan from the government to assist the airline industry. Although originally slated to receive $17 billion, the company stated in April of 2020 that they would not be accepting any government aid. Boeing was able to raise $25 billion in a bond sale, which will be used to support the company through the COVID-19 crisis.
- In March of 2020, share prices reached their lowest point since 2013.
- The company’s market cap has fallen to $76 billion, relinquishing Boeing’s position as the largest aerospace/defense stock.
- The relative strength (blue line on the chart below), which compares Boeing stock to the performance of the S&P 500, has been consistently falling. A downward-sloping relative strength line indicates that the company is underperforming the S&P 500. Alternatively, an upward-sloping line indicates that the company is outperforming the S&P 500.
If you looked only at the past six months, you would likely believe that Boeing’s future is grim. As the stock has begun to soar this week, however, investors are wondering if the company could make a comeback. Check out this graphic from this past week, which compares Boeing stock to the Dow Jones Industrial Average (DJIA):
It’s possible that this exaggeration of the stock price is caused by over-enthusiasm and bandwagon investing, but that might not be the case. What does the technical analysis show us?
Why You Should Invest
There are a few reasons why investing in Boeing might be profitable:
- Boeing is far too valuable to the U.S. government to fail. If the $17 billion aid package that the company was initially supposed to receive is any indication, the government deems Boeing as vital to national defense. Since this is the case, investors shouldn’t worry about Boeing filing chapter seven bankruptcy and liquidating in the near future.
- The company chose not to accept government aid during the COVID-19 pandemic, which indicates that Boeing’s leaders are confident in their ability to ride out future crises. If Boeing had accepted government aid, it would have shown financial weakness and instability within the company. Investors should be reassured that such weakness is not yet evident.
- The economy is booming at similar levels to pre-virus conditions, which means that short-term investor sentiment is positive. This wave of growth may not last long, but it is something that investors should try to profit from.
Why You Shouldn’t Invest
Boeing is still a long ways from regaining its original dominance. Here’s why investing in Boeing might not be prudent:
- There’s still far too much risk. Based upon the fundamental analysis alone, the company’s inability to turn a profit does not bode well for the future.
- Although they are an important company to the U.S. government, that doesn’t mean that Boeing will always stay the same. If the government has to provide financial assistance to Boeing in the future, it’s possible that the government will take an ownership share in the company. This would drastically change the nature of Boeing, which would create investor uncertainty and company instability.
- There are still many unknown variables at play. As The Wall Street Journal reported on June 5, 2020:
Boeing sits in the middle of many of the swirling issues in the markets. Its primary customers are airlines, which are under duress. They need business people and tourists to resume traveling. And for that to happen, the economy needs to recover, and progress needs to be made toward a coronavirus vaccine.If those things don’t happen, it is hard to see how Boeing grows. Wall Street estimates, according to FactSet, call for the company to lose $4.17 a share this year.
What happens if travel is restricted again? What happens if an effective and obtainable vaccine is not available for another year? These questions, among others, make Boeing a difficult company to invest in.
What do you think? Do you think the future of Boeing looks bright?
© Aaron Schnoor 2020