Boeing: The Strike Is The Latest Factor Adding To Its Challenges
Contributor since 2011 / 26229 Followers
Summary:
- The Boeing Company’s shares have hit new lows due to massive strikes and ongoing financial challenges, including increased debt and shareholder dilution.
- The $8.3 billion Spirit AeroSystems deal adds debt and dilution, straining Boeing’s balance sheet amidst ongoing production and quality issues.
- Pro forma net debt has risen to about $50 billion, with strikes only adding to the current losses, making the outlook for shareholders dire.
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Shares of The Boeing Company (NYSE:BA) have hit fresh lows on the news of massive strikes at the company’s factories. This is the latest bad piece of news in a long string of bad news announcements, lasting for years now.
The deal will create additional financial stress onto the business, which has seen plenty of challenges of its own, and in fact was “forced” to buy Spirit AeroSystems (SPR) (at least it announced this deal early in the summer).
That deal was long-awaited and needed for Boeing to regain control over production and quality, yet the near term “contribution” would be losses, more debt and shareholder dilution. With the company seeing further significant cash outflows during the second quarter, and likely the third quarter as well (amidst a big strike taking down production) the outlook simply remains very challenged here. This means that I am far from tempted to buy the dip yet.
Tough Times
Over the summer, Boeing announced a much-awaited deal for Spirit AeroSystems in a deal valued at $8.3 billion. The deal announcement was quite politicized as Boeing’s executives touted how such a deal would be in the best interest of airline customers, the entire flying public, and even the country. I believed then that this would likely be a proactive stance to fend off any potential antitrust concerns.
While the deal would be paid for in stock, nearly half of the transaction price was comprised out of net debt, to be assumed by Boeing, of course. This adds debt and dilution at depressed prices, putting further strain on the balance sheet. Boeing’s finances have taken a few hits following substantial share buybacks in the latter 2010s, the pandemic, and amidst the quality and production issues faced recently.
The business and shares peaked in 2019, when investors were valuing shares around the $400 mark, at a time when the business cranked out operating profits of $12 billion on sales of a hundred billion. The downfall came amidst a myriad of items, as the facts are of course clearly discussed. The overall demise has been part of a changed culture away from quality, pride, and engineering towards outsourcing, shareholder value and efficiency.
One of the few only things going for the business were the long term rosy prospects for the business, with the backlog of the business hitting half a trillion here.
The Numbers
2023 was actually a solid year regarding the top line, with sales up 17% to nearly $78 billion. That was about the good news, as the company still posted core operating losses of $1.8 billion, with losses posted at nearly $6 per share.
The company posted sales declines and continued losses in the first quarter, all while net debt was reported around $40 billion, a number which will increase to $44 billion if we factor in the assumption of net debt of Spirit AeroSystems.
This was quite concerning, even as the company believes that cash flows would improve throughout the year. All of this made me very cautious, as even if Boeing were to return to sales of $100 billion and margins of 10%, I saw earnings stuck around the $10 per share mark. Trading at $180, valuations were reasonable in July, assuming that Boeing could make a full comeback.
Over the summer, by the end of July to be more precise, the company posted second quarter results. Second quarter sales fell 15% to $16.9 billion, as the company saw significant deleverage on the bottom line, with core operating losses posted at $1.4 billion, and GAAP operating losses reported around a billion. Amidst poor cash flow conversion, the company saw net debt up to $45 billion, that is ahead of the acquisition of Spirit AeroSystems.
All this was rather bleak as the company continues to see organic dilution to the tune of 1-2% each year, with the second quarter share count up to 615 million shares.
At the same time, the company announced that Kelly Ortberg was to become CEO of the business, succeeding Dave Calhoun. Mr. Ortberg is an industry veteran, having held leadership positions at Rockwell Collins, among others.
The Latest Woes
On top of still operating vastly unprofitable operations, and seeing net debt tick up to $50 billion pro forma in the Spirit deal, Boeing is now suffering from major strikes as well. After offering a 25% hike in pay for the coming four years, the union, in an overwhelming reaction, turned down the offer. Unions were calling for job security as well as demanding grater pay hikes, and better pension benefits.
With about a quarter of the workforce being unionized and on strike, it is hard to say what all this means for the operations, but the direction of travel is clear. This only adds to the current operating losses, thereby the debt load. Strikes will furthermore postpone deliveries even more, angering customers, although frankly the reality is that they have little choices with airline manufacturing being an oligopolistic industry.
With shares falling to fresh lows, equity issuance (which the company is already doing) is a painful outcome for investors, as frankly the outlook for shareholders is dire. While comments are made that the business is too important to the US as a key industry, and therefore will not be allowed to go bankrupt, all these statements are true. Yet, the reality is that a savior of Boeing, or guaranteed future, does not mean a guaranteed future for shareholders as well.
Any strike could easily cost a couple of billions in the time frame of just a few weeks/months. In fact, analysts pegged the cost of a 50-day strike at $3.0-$3.5 billion, or $60-$70 million per day. Even a resolution might not be a real solution as well. If labor costs are raised by more than 25%, which is essentially what is offered by Boeing, questions can be asked about listing prices and/or margins of the business going forward as well.
Amidst all this, I understand perfectly the continued pressure on the shares. Down to the $150s here, the market value has actually fallen just below the $100 billion mark here. This is for a good reason, given the debt piled on, as less than a decade ago Boeing used to operate with a (substantial) net cash position!
Given all this, I remain very cautious about The Boeing Company, mostly for fundamental reasons. Improvements in deliveries and margins are unlikely to materialize in the second half of the year, given the strike and other dynamics, leaving the proof of burden with new management.
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