After Boeing pessimistically claimed that major airlines were in for a tough fight post-virus, should investors take a chance on this beleaguered plane maker?
With a backlog of almost 5,000 plane orders, Boeing (NYSE: BA) is in survival mode. Many customers, including General Electric (NYSE: GE) and Air Lease (NYSE: AL), have cancelled orders as the aviation industry nosedives during the COVID-19 pandemic.
Between February 11 and May 13, Boeing stock has fallen from $344 to around $125 per share. This is in line with the current aviation market, which expects to take a $314 billion revenue hit this year. Yet, Boeing has some other, highly publicized problems to overcome. So should investors take a chance on this beleaguered plane manufacturer?
The grounding of the 737 series has cost the company around $20 billion so far. Despite the push-back date for the re-release of its flagship jet, Boeing will begin work on the Max again in May. This shows that despite the havoc caused by the coronavirus, Boeing is determined to fix this very dark stain on the airline’s reputation.
The 737 Max jets will be set to re-enter the flight service at the tail end of lockdowns and restrictive measures. This could help the company generate new orders and revenue as flight numbers will be slowly picking back up again.
Boeing has laid out a plan on how it will weather this storm. This plan includes layoffs as well as the cessation of dividend payments and stock buybacks; these survival methods will help preserve cash reserves. Yet, investors would do well to remember that the past three years have not been kind to Boeing. Revenue contracted an average of 6% in this three-year period whilst earnings per share has grown 0%.
Although Boeing did not accept funding help from the government, the stimulus package of $2 trillion bolstered the credit markets and allowed Boeing to raise $25 million in a private investors bond offering. By not taking any money from the government, Boeing has given itself a chance at survival without the restrictions that would have definitely been imposed with a bailout sum.
The government bailout will instead encourage airline operators and suppliers to keep up-and-running in the short-term. In the long-term, this will allow companies such as Delta (NYSE:DAL) and Southwest (NYSE:LUV) to begin buying planes again. However, even Boeing does not see a return to normal pre-COVID-19 levels for another 3-4 years, which will have an impact on its bottom line and the sector overall.
Boeing also produces aircraft and other technology for the U.S. military, as well as collaborating with NASA on space craft technology. It was expected that these would be the sectors that could keep Boeing afloat during the grounding of the 737 Max. Additionally, the Department of Defence has exempted military manufacturers from quarantine restrictions.
However, things have not been looking great in these sectors either. Military production for Q1 only delivered 3 more aircraft than the lowest quarter of 2019 — sitting at 39 units. year-over-year, which is 35% less than 2019 Q1. And whilst the number of units delivered has varied greatly over the last few years, the Pentagon is seemingly looking overseas to modernize its fleet. This is on top of the fuel tank issues that Boeing is working on with the KC-46 tanker aircraft, which is $3 billion over budget and behind schedule by 3 years.
As for the space program, since the failure of the company’s starliner test flight, NASA has also seemingly lost faith in Boeing’s ability to deliver. In recent news, they passed over Boeing in favour of Tesla (NASDAQ:TSLA) CEO Elon Musk’s SpaceX program for the Lunar Cargo contract. This in itself is another setback for Boeing which desperately needed a win.
Besieged as it is with technical problems in all three of its main product sectors, I cannot see Boeing recovering its industry leadership status for many more years. That is not to say that it might not happen, but that the company might have put in the groundwork before it can fully return to the skies.
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