The last two years have not been kind to Boeing (BA, Financial), one of the world’s largest aerospace firms. The Covid-19 pandemic hit when it was already struggling under the weight of several deadly failures of its aircraft, particularly the 737 Max, which was rushed through production too quickly. There were also some notable cases where it underperformed on the military aircraft front.
Can things get back to normal? That's the million-dollar question for investors. Let's take a look at the company, where it went wrong and why I believe it presents a value opportunity now.
Company overview
Boeing has four key operating divisions: Commercial Airplanes (BCA), Defense and Space (BDS), Global Services (BGC) and Boeing Capital (BCC).
BCA produces and markets commercial aircraft primarily to serve the global airline market. The current lineup being produced includes the 737, 747, 767, 777 and 787 wide-body models. Development programs are ongoing for the 777X and 737 MAX.
BDS develops and produces miliary aircraft, weapons systems and command and control systems. The largest customer is the U.S. military, which represented 84% of segment revenues in 2021.
BGC mostly deals with existing customers with services such as supply chain management, logistics, upgrades, repairs, training and other data and digital services.
BCC is the financing arm of Boeing that helps customers take delivery of purchased airplanes. These services include operating leases, finance leases and other lending arrangements.
The company was founded in 1916 and currently has a market capitalization of $115 billion.
Recent issues
In 2018 and 2019, there were two major fatal crashes involving the company’s new (at the time) 737 Max aircraft, which caused the regulatory grounding for that aircraft. That delayed sales of one of their most profitable aircraft and severely damaged the company’s reputation, not to mention their profits.
According to the flight-data recordings of both the downed 737 Max aircraft, the reason for the crashes was asensor failure tied to a new and obscure control function that is unique to the 737 Max: the Maneuvering Characteristics Augmentation System (MCAS). Because the 737 Max was rushed thorugh production too quickly in the company's haste to make it profitable, the company failed to properly test this function for errors.
This speaks to gross mismanagement at Boeing; with such neglectful management at the helm, how could the company possibly continue to prosper? Safety and proper testing are essential for companies producing a product that puts their customers' lives at risk. Mistrust of Boeing's product safety immediately caused customers to re-consider whether they wanted to buy aircraft from Boeing, or from one of its competitors.
Then the Covid-19 pandemic came in 2020, which resulted in a severe drop in air traffic. Global passenger traffic dropped a record 65.9% in 2020, the largest on record. This caused record delays in new aircraft shipments and service revenues, which caused Boeing’s revenues in the BCA segment to drop an astounding 50%. The company also reported a large net loss of $11.9 billion as well as negative operating cash flow of $18 billion.
With the Covid-19 pandemic retreating to endemic phase, Boeing may finally get some breathing room. The company has also been making efforts to overhaul the problems with its management, engineering and production since David Calhoun took over as CEO in January 2020.
2021 financial review
That road to recovery may have finally started bearning fruit in 2021. Revenues increased 7.1% to $62.3 billion for the year, with the airplane segment leading the way with 20.7% revenue growth. The company delivered 340 airplanes during 2021, which more than doubled 2020 levels of 157. However, that was still below 2019 deliveries of 380 and well below record levels in 2018 of 806 jets.
Although Boeing generated positive gross profits of $3.0 billion compared to negative gross profits in the prior year, the company still reported a net loss for the year of $4.0 billion compared to a net loss of $14.1 billion in the prior year. Operating cash flow remained a negative $3.4 billion, but this was still a vast improvement from 2020.
The company has had to finance these losses in recent years with additional debt, so the balance sheet looks more levered than in the past. At year-end, cash and investments balances stood at $16.2 billion and total corporate debt (non-BCC) was $56.6 billion. This is a significant increase from $27.0 billion at the end of 2019 and $13.8 billion at the end of 2018. However, the company has still maintained its investment grade debt ratings of BBB- by S&P Global (SPGI, Financial) and Baa2 from Moody's (MCO, Financial).
The company suspended it dividend in March 2020 due to severe financial distress. Boeing has not indicated when it will resume its dividend payments, which dated back as far as the 1940s before it was cut.
Valuation
As the company recovers, I believe its future earnings potential has not yet been priced in to the stock. Consensus analysts call for earnings per share of $3.00 in 2022 and $7.38 in 2023. However, in the company’s last good year, they earned $17.85 per share in 2018. I have faith that the management overhaul will pay off and the company can get back to its former glory someday, even if that day is many years in the future.
Therefore, the forward price-earnings ratios for 2022 and 2023 are somewhat meaningless, as they don't recognize the company’s long-term potential. Free cash flow is expected to be positive in 2022, but only in the low-single billions range. If a normalized recovery continues and there are no extraordinary circumstances in 2023, free cash flow could be as high as $10 billion.
Guru trades
Gurus who have purchased Boeing stock recently include Mario Gabelli (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). Gurus who have reduced positions include Catherine Wood (Trades, Portfolio) and Jim Simons (Trades, Portfolio).
Conclusion
Boeing appears to be undervalued as a result of the major negative issues affecting the company’s delivery of aircraft. However, I believe these issues will alleviate over time and Boeing should be able to return to historical profitability and cash flow over the next three to five years, which could offer above-average market gains during that time frame.
