Boeing (BA) is one of the world’s largest aerospace companies, manufacturing and selling airplanes, rockets, satellites, and missiles worldwide. Boeing has several business segments, including Commercial Airplanes, Defense, Space and Security, Global Services, and Boeing Capital. The company was founded in 1916 and is headquartered in Chicago, Illinois.
Boeing has faced an unprecedented two-year period due to COVID-19, which severely impacted the airline industry. In addition, the two fatal accidents involving its 737 MAX airplanes resulted in it being grounded worldwide for approximately 20 months.
I am bearish on Boeing because there are severe fundamental factors that make the stock very risky and highly uncertain. (See Analysts’ Top Stocks on TipRanks)
Boeing Business Highlights
The troubled aerospace company strongly supports ESG (Environmental, social, and governance) investing. For example, it announced a $1.8 million donation to organizations supporting Indigenous communities in the U.S., along with other contributions aimed at other causes.
Turning to business news, Boeing announced several orders for its airplanes. 777 Partners, a Miami-based private alternative investment firm, ordered 30 additional 737 MAX airplanes. Other notable purchases include Akasa Air, which has ordered 72 737 MAX airplanes, and Emirates, which has ordered two Boeing 777 Freighters.
Boeing won a $367 million deal to modify F/A-18 fighter jets and is optimistic that there will be a $9 trillion addressable aerospace market over the next decade, presenting opportunities in several sectors such as commercial, defense, and services.
The question to answer is whether Boeing will survive amid this slow recovery in the airline industry because its current financial strength is very weak. Boeing has an Altman Z-Score of 1.5, placing it in the distress zone and implying that bankruptcy is possible within the next two years.
Third Quarter Results: A Miss on Adjusted Earnings and Revenue
Boeing reported adjusted EPS of -$0.19 and revenue of $15.3 billion, which fell short of the analysts’ consensus of -$0.15 and $17.2 billion for the adjusted EPS and revenue, respectively.
There was also a miss on commercial airplane deliveries as Boeing reported 85, lower than the consensus figure of 96. Operating cash flow was -$262 million, while free cash flow was -$507 million.
Cash and investments in marketable securities were $20 billion for Q3 2021. On a positive note, Boeing has mentioned that it has delivered more than 195 737 MAX aircraft since the FAA approved it in November 2020. It has a current production rate of 19 aircraft per month and is expected to increase to 31 per month in early 2022. Furthermore, efforts to further improve the production rate are currently being evaluated.
However, there are problems related to the 787 aircraft production phase, with key factors such as low production rates and product issues expected to result in approximately $1 billion of abnormal costs. $183 million of these costs have been recorded in the most recent quarter.
Three Major Fundamental Risks
A fundamental analysis of BA stock shows at least three red flags. First, the Total Shareholders’ Equity in Fiscal Year 2020 was -$18.32 billion. In Fiscal Year 2019, it was -$8.62 billion. A negative shareholder’s equity means that Boeing has more liabilities than assets, thus accumulating losses. Shareholders’ equity is an important metric to value the company’s net worth. Furthermore, with negative cash flows, the company’s heavy debt load can cause a severe problem, leaving very little room for optimism.
In addition, there has been stock dilution in the past year, with total shares outstanding growing by 4.1%. Boeing has a history of negative EPS surprises, as it has reported only two positive EPS surprises in the past eight quarters. The most notable positive surprise was in the second quarter of 2021, when Boeing reported positive EPS of $0.40, the first positive figure within two years.
Another negative factor is that the aerospace company has reported negative free cash flow, burning $4.89 billion in the last nine months. Therefore, Boeing has to delicately balance ramping up production to meet the demand for its products while also having enough liquidity leftover to meet its debt obligations. This puts it in a very risky financial position.
Wall Street’s Take
Turning to Wall Street, Boeing has a Strong Buy consensus rating, based on 13 Buys and three Holds assigned in the past three months. The average Boeing price target of $270.80 implies 38% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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