by Vlae Kershner Contributor since 2016 / 1824 Followers
4 months ago
Summary:
Boeing has become the first company to make my scandal stocks list twice.
Boeing stock continues to decline after the Alaska Airlines flight incident and temporary grounding of 737 MAX 9 planes.
The April quarterly earnings report looks to be brutal.
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For some time, I’ve been keeping a list of scandal stocks–issues that decline because of a specific negative event rather than a general decline in their prospects.
The main theory is that stocks do not bottom immediately after the negative event, because of the inevitable government investigations, lawsuits, and negative headlines. However, the damage is usually not fatal.
Boeing got on this list after the two 737-MAX 800 crashes in 2018-19 that killed 346 people. In January 2020, I put a sell rating on the stock when it was at $309, timing that turned out lucky due to the COVID-19 crisis, as the stock bottomed at $95 on March 20. The plane was finally allowed to fly again in November 2020.
Now BA becomes the first company to make a return trip. Since the panel blowout on an Alaska Airlines flight January 5, the stock has declined as much as 28%, even though the midair incident near Portland did not cause any fatalities.
Boeing has all three of the negatives listed earlier. Class action lawsuits have been filed. The FAA barred Boeing from expanding production of the MAX line pending a safety management review. Negative headlines have continued for months, a timeline shows.
The median scandal stock on my list bottomed after 130 days, about two months longer than Boeing’s current crisis has lasted. Generally, corrective action needs to be taken, and Boeing did so last week by replacing the board chair and head of the commercial airline division and announcing that CEO Dave Calhoun is retiring at the end of the year. The problems obviously predate Calhoun, since he was appointed during the prior 737-MAX crisis in January 2020.
There are probably more shoes to drop at Boeing. One is the first quarter earnings report, due around April 24. Analysts have made 19 downward revisions in the last month compared to one increase, with negative GAAP earnings of $0.27 expected.
In a March conference call, CFO Brian West acknowledged that cash flow for the first quarter would be negative, with profit margins at Boeing Commercial Airplanes division at negative 20%, and that the rest of the year would be affected.
And in the quarter, our free cash flow will be a usage of somewhere between $4 billion and $4.5. And that’s higher than we originally planned back in January. And there’s two things driving it.
First of all, there’s a combination of lower deliveries, lower volume at BCA, and negative mix from inventory to airplanes. That’s a big piece of the delta. And then there are some working capital pressures, both inventory as well as some receipt timing. That is what’s going to happen in the quarter.
And we also believe that some of that will not be made up for, for the full year. So the full year of free cash flow is expected to be in the low single-digit billions of free cash flow generation.”
A chart shows that cash from operations has never recovered from its 2019 level, and another downturn will further the narrative the company remains in crisis.
The company is still expecting to reach $10 billion in annual free cash flow, but that has been pushed off into 2025 or 2026.
With 606 million shares outstanding and a near-market multiple of 20 times free cash flow, that implies a long-term price target of $330, a 65% increase from the recent price around 200. However, it will take several years to reach a level of confidence that will justify a 20 multiple, Citigroup noted in recommending the stock.
A resumption of the dividend (suspended in 2020) is so distant on the horizon as to not figure in a total return calculation.
On the negative side, reputational damage and aging product evolution are making customers increasingly likely to choose Airbus, as several overseas carriers have done already. News articles have focused on a long-term cultural crisis at Boeing as an engineering culture migrated to a financially focused one. A long, slow decline is in the cards unless there is a turnaround.
Most scandal stocks recover, even Luckin Coffee, which looked like a dead Peking duck after a 95% plunge because of accounting fraud.
Boeing, with a strong position in national defense and as one of only two major commercial airline producers, has enough financial breathing room to right its business. Fitch recently affirmed its BBB- rating and stated it viewed its liquidity as “sufficient” to maintain that rating.
Still, I am reluctant to call a bottom and would stay away at least until the bad news about first quarter earnings is reported.
Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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