Having been first plagued by the grounding of its 737 Max model and now suffering from the COVID-19 pandemic, is Boeing a good buy yet?
After two fatal crashes which claimed the lives of 346 passengers, Boeing’s (NYSE: BA) important 737 MAX plane was grounded worldwide. Once the pandemic was in full gear, flight routes and schedules were drastically slashed globally, and as one of the leading aircraft manufacturers, Boeing suffered. However, with its stock now almost doubling since its March lows, is Boeing a good buy again?
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The bull case for Boeing
Prior to the first crash, Boeing had steady revenue growth, earning $101 billion in 2018, a 57.26% increase from 2010. Along with passenger and freight airlines, the company also earns 30% of its revenue via defense contracts by manufacturing vehicles and missiles. On that front, the Navy awarded Boeing a $3.1 billion deal in May to supply cruise missiles to its allies. Also, thanks to the company’s multiple partnerships, its supply chain for its essential Apache helicopters has not been disrupted.
To prevent the U.S. government from taking a stake in its business, Boeing raised $25 billion in a massive bond sale and has roughly $40 billion in cash available to shield it well into 2023. That should be ample time for the airline industry to recover, according to CEO Dave Calhoun, who feels that air travel demand will take roughly three years to return to pre-pandemic levels. The company has been working diligently on correcting software issues with its 737 Max line and expects restrictions to be lifted in August or early fall of 2020; in fact the FAA has already begun testing the line last week.
The bear case for Boeing
Boeing said that it lost nearly $19 billion from the crashes that caused the groundings as airlines canceled orders of the 737 Max and instead turned to its competitor Airbus (EPA: AIR) for hardware, helping it overtake Boeing as the leading aerospace company. The 737 Max was the company’s best-selling plane and its grounding has had impacts on various parts of the aerospace industry including parts supplier Spirit AeroSystems (NYSE: SPR), which had to lay off 2,800 employees, and Ryanair (NASDAQ: RYAAY) which closed bases and cut jobs. Both the chairman and CEO decided to forego their salaries for 2020 and the company discontinued its dividend and all stock buybacks.
Boeing itself had to cut 10% of its workforce, or roughly 16,000 jobs, with the deepest cuts in its commercial airliner division as a result of the recent troubles. The airline industry is expected to lose roughly $300 billion this year and Boeing will bear some of that loss as it cannot sell its top-selling model. Litigation from the crashes is expected to hit the company’s bottom line as well; it already settled a lawsuit for $1.2 million for 11 of the families of victims who perished in the 2018 Lion Air crash. Additionally, the company has debt that has surpassed the entire nation of New Zealand after its huge bond sale.
So, is Boeing a good investment?
Having suffered before the COVID-19 calamity and then further as a result of it, Boeing seems to have been hit with a double whammy. However, I feel that the company is still doing just fine in its other two divisions, particularly in defense. The air-travel sector might not be too big to fail but it’s certainly too essential to fail and the U.S. government will not allow that to happen if it ever comes to that. The International Air Transport Association expects pre-pandemic global air travel to resume by 2024, making Boeing a solid long-term investment that is available at a reasonable discount right now.
Who is the CEO of Boeing?
Dave Calhoun, as of January 13. 2020.
Does Boeing pay dividends?
It did but discontinued due to the pandemic, its last payment was for $2.05 on March 6, 2020.
Does Warren Buffett own Boeing?
No. Warren Buffett does not own shares in Boeing.
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