Can Boeing Make a Comeback?

How large are a business’s barriers to entry?

Depends on the industry.

e-commerce, consulting, retail, and a few others are really easy for anyone to jump in and compete. 

Aerospace and defense definitely aren’t. The costs associated with entering the market along with the technical skill sets led us to a sector dominated by a few players.

And like the big banks in 2008, some are just too big to fail. 

Boening (BA) is one of those too big to fail companies. And while it has just experienced two of the worst years of its company’s history, a turnaround is likely to happen. 

Despite shares dropping more than 50% over the last 3-years, and the myriad of troubles the company faces, financial pros keep searching out the stock in hopes of a rebound, ranking it consistently in the top two for aerospace and defense stock searches.

But is the stock worth the risk?

Below you can read our breakdown, and why you shouldn’t bet against BA.

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The Boeing Company (BA) Business 

BA designs, develops, manufactures, sells, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems, and services worldwide. 

The company breaks down its business into the following segments: Commercial Airlines, Defense, Space & Security, Global Services, and Boeing Capital. 

BA has produced over 10,000 737 aircraft, becoming  the first commercial jet to reach the milestone. 

The firm was awarded lots 6 and 7 contracts for 27 KC-46A Tanker aircraft for the U.S. Air Force in 1Q21. 

In addition, BA was awarded contracts for proprietary space programs in 4Q21. 

Boeing struggled mightily the last few years with the pandemic hitting on top of problems with its new Max jets. While those issues have been largely resolved, it recently ran into structural problems with its 787 Dreamliner. Management expects the deliveries of the new airplane in the second half.

This is a critical issue as the company desperately needs cash.

Financials

2021 was a turnaround year for BA, which saw its revenue increase from $58B in 2020 to $62B in 2021. Of course, the numbers are still off from years past. In 2018, BA did  $101B in revenues. 

BA has negative free cash flow of 4.3B. Traditionally, it has had a positive free cash flow, but it hasn’t been positive over the last three years, the last two understandably so due to the pandemic. 

The company garners a forward price-to-cash flow of 24.6x, which is rich compared to the sector median of 13.9x. 

Furthermore, BA has an enterprise value-to-sales ratio of 2.4x, which is slightly higher than sector median 1.83x.  

The company’s current ratio of 1.3x is decent given the inventory issues.

However, BA has a quick ratio of 0.34x. That means its highly liquid assets are 0.34 greater than its short-term liabilities which is a major concern.

Valuation

BA has had to take on a lot of debt due to the pandemic. In terms of its capital structure, it has a total debt of $59B and cash upwards of $16B. 

Its Price to Earnings Ratio (Non-GAAP) last year was 57.97x, which is significantly higher than some of its competitors: Lockheed Martin (LMT) 17.16 , Northrop Grumman (NOC) 18.7,  and General Dynamics (GD) 20.4. 

However, the company is not profitable at the moment with a forward GAAP P/E of 37.73x and non-GAAP of 57.21x

Nor is BA as profitable when you compare its gross profit margin to those companies, 8.3% vs. Northrop Grumman (NOC) 20.3%,  Lockheed Martin (LMT) 13.5%,  General Dynamics (GD) 16.7%

On the other hand, BA has experienced better Year over Year revenue growth at 7.1% compared to  Northrop Grumman (NOC) -3%,  Lockheed Martin (LMT) 2.5%,  General Dynamics (GD) 1.4%

Our Opinion – 3/10

BA is down considerably from its all time highs $446 per share, as well as its 2021 high of $278. The last two years have been rough on shareholders to say the least. 

However, one could argue that BA is too big to fail. And if it was able to get through during the pandemic, it will find its way back to profitability. 

But given how much debt the firm has acquired, it really can’t afford too many more setbacks. 

Structurally, this company needs to find some stability. Any investment here is a bet BA won’t require a complete shakeup. That’s just not a risk worth taking in this environment.