Throughout this week, one of the biggest news stories, without question, has been the fatal crash of a Boeing 737 MAX jet flown by Ethiopian Air shortly after takeoff on March 10. The crash took the lives of all 157 that were onboard the plane, and it was the second such crash in five months by the same jet (a Lion Air flight crashed in October 2018, taking 189 lives and leaving no survivors). Details about the cause of the crash are still being investigated, but in the aftermath, every country in the world has temporarily grounded the 737 MAX aircraft, with Canada and the United States being the final governments to follow Indonesia and China, who were the first to order airline companies to keep their fleets of the plane grounded until further notice.
The news has understandably been devastating for Boeing Co. (BA) stock, which dropped from around $420 per share at the end of last week to around $370 at its lowest point on Monday. The stock is a little above that price now, but any kind of upward momentum seems to be fleeting at best, as the market struggles to understand not only what happened, but also what the long-term impact is going to be for the company.
Here are few things that are known. The 737 MAX is BA’s most popular, advanced, and fuel-efficient, single-aisle plane. Out of the 95 total jets that the company shipped in the first two months of this year, 66 were 737 model planes. Airline companies across the world aren’t merely grounding the planes they already have; they are also evaluating deals already place for future orders. Lion Air, Indonesia’s national air service, was reported on Tuesday as planning scrap approximately $22 billion of orders for 200 Boeing 737 MAX jets and switch to Airbus. Vietnam’s largest carrier has stated it will decide on its future orders after the Ethiopian Air crash probe is completed, and the Indian government said yesterday it won’t take any deliveries of the aircraft until safety concerns are resolves.
BA currently manufacturer 52 units of the 737 plane every month, and had planned to increase that output to 57 units monthly. Those plans, presumably will have to be put on hold until more is known about the crash, and what the impact will be on carrier orders across the globe. Exactly how that will impact the company’s bottom line remains to be seen; but I think it’s natural to believe that in the short-term the stock is going to keep showing a lot of volatility.
BA is doing what it can to try to minimize the damage, and is cooperating with the investigation. They are also implementing a software change to the plane’s automated flight systems and which many analysts expect will definitively answer concerns about elements that appear to have contributed to both crashes. Does that mean there is a good long-term opportunity to be had at the stock’s current price, or is the downside risk just too big to justify right now? Let’s take a look.
Fundamental and Value Profile
The Boeing Company is an aerospace company. The Company’s segments include Commercial Airplanes; Defense, Space & Security (BDS), such as Boeing Military Aircraft (BMA), Network & Space Systems (N&SS) and Global Services & Support (GS&S), and Boeing Capital (BCC). The Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, to the commercial airline industry. The Commercial Airplanes segment also produces commercial aircraft and offers a family of commercial jetliners. The BDS segment’s operations involve research, development, production, modification and support of the products and related systems. The BMA segment is engaged in the research, development, production and modification of manned and unmanned military aircraft and weapons systems. The BCC segment’s portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease and investments. BA has a current market cap of about $212.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 14%, while revenues grew by almost 12%. The the last quarter, earnings improved even more, at 53% while sales increased nearly 13%. The company’s margin profile is healthy and has been showing improvement, with Net Income as a percentage of Revenues increasing in the last quarter to 12% from 10.3% in the most recent quarter, indicating the company has a very healthy operating model.
Free Cash Flow: BA’s free cash flow is good, at $13.7 billion. That translates to a Free Cash Flow Yield of 6.4%. That may not seem especially impressive as a percentage, but it is also worth noting that at the beginning of 2017, Free Cash Flow was less than $8 billion, with steady improvement in nearly every quarter since.
Debt to Equity: BA’s debt to equity is 25.99, which means BA is one of the most heavily leverage companies in the Aerospace & Defense industry. Their balance sheet shows about $8.5 billion in cash and liquid assets against $10.6 billion in long-term debt. Their operating margins are more than high enough to enable the company to service their debt.
Dividend: BA’s annual divided is $8.22 per share, which translates to a yield of about 2.19% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BA is $.72. That’s not a typo; until the most recent quarter the stock’s Book Value was 0. That means that the stock Price/Book ratio is more than 500, which really makes it hard to use the Book Value as any kind of useful valuation metric. In this case, the more useful ratio is the Price/Cash Flow ratio; the stock is currently trading about 32% above its historical Price/Cash Flow ratio. That suggests a reasonable “fair value” for the stock is around $254 per share. I think the fundamental strengths could all come under some pressure in the next quarter or two as the company continues to deal with the fallout of the grounding of their most popular jet, which to me means there is a lot more downside risk in this stock right now than there is value.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last two years of price activity. The red diagonal line traces the stock’s upward trend to its peak in February at around $46. That line also informs the Fibonacci retracement lines shown on the right side of the chart. Despite the stock’s plunge at the beginning of this week, or perhaps because of it, the stock is now sitting pretty close to support around $365 per share. If the stock can hold that support, or pivot back to the upside from it, it could start to fill some of the gap it created with its overnight drop on Monday, with a potential short-term rally to between $395 or $400, which is roughly in the middle of that gap. A break below support at $365 would probably see the stock drop to anywhere between $350 and $340 per share; that kind of bearish momentum would probably also push the stock’s short-term downward trend trend into an intermediate term trend, with a strong possibility of seeing it extend into a much longer pattern.
Near-term Keys: Given the current state of sentiment against the stock right now, I think any kind of bullish trade or investment in BA is extremely speculative. Until the company can resolve any concerns about the 737 MAX, you can expect that their ability to keep revenues flowing for the plane will remain on hold. They have indicated they will maintain their current production schedule, which means holding finished planes until delivery can be completed. I expect we may not know what the true financial impact of this tragedy may be for the next couple of quarters, which means it may take until June of this year to see any really useful data. The fact is the stock’s bargain price, based on Price/Cash Flow analysis is around $200, which is a long ways away from the stock’s current price, so for now, I believe BA is, in fact, radioactive.