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Don't Bet Against Boeing

May 05, 2020 1:15 PM ETThe Boeing Company (BA)164 Comments
AB Capital profile picture
AB Capital


  • Boeing raises $25bn of debt, which should more than settle investors' nerves around its liquidity position.
  • Leverage ratios seem elevated but should be manageable once the free cash flow profile normalizes.
  • The incremental ~$1.3bn of interest expense will, admittedly, eat into BA's earnings power.
  • But with FCF on track to normalize to $22-23/share, there is a clear path toward the medium-to-long-term upside, in my view.

Watching the Berkshire (BRK.A) (BRK.B) annual meeting this year, one quote, in particular, stuck out to me - "If you think about Boeing, it is one hell of a company." Now, Warren admittedly did not invest in Boeing (NYSE:BA), but at current levels, I am starting to see BA as significantly mispriced, with a highly compelling risk/reward opportunity for patient, long-term investors.

It is important to highlight that Boeing operates in a much different part of the value chain to the airlines and has, historically, been able to deploy capital at very favorable returns. As part of a global duopoly that has lasted for decades, BA enjoys a powerful, well-protected moat, and following its latest debt raise, I believe Boeing's moat is intact. Though its earnings power has likely been reduced following the $25bn debt raise, I see plenty of levers to drive margin improvements from here. This should, eventually, translate into stronger cash flows over and above what the market is currently pricing in. My price target range for BA shares is at $220-230.

BA's $25b Debt Raise Highlights the Path Toward a >$20bn Cash Balance

Boeing's latest "blowout" debt offering leaves the company with ample liquidity this year, in my view, and allows it to avoid taking on government support. Per the prospectus, the ~$25bn of proceeds will be primarily allocated toward "general corporate purposes," providing the company with ample runway to address potential funding challenges or support the supply chain via working capital advances, for instance.

Source: Boeing Prospectus

Crucially, the ~$25bn funding likely covers the cash burn for the remainder of the year (1Q20 cash burn was ~$6bn), as well as the ~$5bn debt coming due.

USD' bn

Operating cash flow


(-) Capex


(-) Dividend


= Implied 1Q20 Cash Burn


This article was written by

AB Capital profile picture
Semi-retired investor and former buy side professional. Keeping an eye on special situations and event-driven opportunities across the equity and credit universe. All views are my own.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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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Comments (164)

Defense remains very strong and the MAX is ready to be approved(expected before end of June). Outlook for Corona control improves daily but they must control the airports better(no more than a 2 hr process) to really juice air travel.
loaded up on the dec. 18 405 strike calls
TeroInvestors27 profile picture
Great Article!

Bought BA at $122, definitely a great long term hold! That $25 Billion raised in the debt markets and just knowing they have government aid if things really hit the fan, this is an easy buy here! BA is more than just commercial aircraft’s especially under an administration that increased the military budget! I see $165-$180 in the short to intermediate term.
save your money and go all in at 50 bucks
TeroInvestors27 profile picture
Definitely could hit $50 but not probable, that’s pricing in failure at that point. I have the capital to scale down if I need to!
BA has its work cut out for it but this CEO has refocused the giant. Defense remains strong and financials are considerably upgraded. When Corona gets controlled and MAX is approved BA could race for and blow thru 200.
BA has become a zombie. A stock speculator could refer other zombies' performances to get clue.

No, a zombie won't belly up quickly thus bet it to go to zero tomorrow or 1 year later is unrealistic.

US government will support zombie BA but the commercial market won't deliver enough food for it to rise again.

Therefore, up and down, LONG BA while its stock price tumble and people talking about government is about to let it go; SHORT BA as the overall market turns down, BA will down more than many others.
Avantier profile picture
First-class airframe manufacturer with second-rate flight control system prowess.

In the age of automation driven by AI, can Boeing really afford to have chips that are two decades behind? Just read the 737 MAX is using a 16 bit/INTEL 286 processor from two decades back as the backbone of this flight control system. I would assume the same processor is being used to handle autopilot, control and other safety systems.

Such a chip limits processing power, memory management and redundancy of the flight control system. Our iPhones can do more than what mainframes could a decade back. Hope Boeing management realize that automated flight control systems should be a core strength of the company in order to improve safety and efficiency of future aircraft.
Airplanes fly just fine with no computers and competent pilots.
286 is not 16bit CPU where is your source?
Sameer Advani profile picture
Other than the fact that nobody wants to fly ever again
That's what was said after 9/11; the average heard animal has very short and fickle memory. It may take a year or two but five years out total revenue seat miles will be record highs. The question is can Boeing take advantage of that.
WeC profile picture
07 May 2020
Boeing's challenge is not COVID-19 nor even Airbus, it's China's domestic passenger aircraft project (which seems to be going no where). Short of China building their own planes, they will need close to 8000 aircrafts in the next 20 years.
what are chances of dying in 737 max crash vs dying from covid if you travel ?
BA with gov open chequebook
Boeing is "one hell of a company" alright. Still no culture changes. I'll wait until it drops below $95 again.
I remember many people crying on SA that NFLX is doomed at 270. Some guy was saying he was short a few millions and that was a sure bet... All were bringing bulletproof arguments, etc, etc.
How can you short Boring at these levels when coronavirus is expected to disappear soon, Boeing remains one of the top companies enjoying Govt support and MAX not far from re-certification (sSome reports mentioned the process is postponed because of the work from home modality. Besides, there is no rush to re-certify in Q2 as long as Covid is still here)?
So BA at $125. A DOW stock is exactly 72% off its 2019 high of $446. 72%!!! I a accumulating here. Hope it dips further. It's a duopoly guys. It will take many years if notdecades for any other competitor to be able to produce aircraft at this scale.
@tony1969 People were making that very same argument at $350.
I concur, bought at 125 and am glad I did. Yes 89 would have been great but I'll be ok with this, if it get's down towards 100 I'll add to my position.
BA traded as high as $446 last year. NO ONE would have thought this would trade at $125 today. A HUGE part of this unprecedented crisis is in the stock. Yes they have lots of issues with most of the governments around the world halting or limiting air travel. There are only two companies that can produce these planes. BA will no doubt rise once there is a hint of stabilty in global travel. Their moat is immense and alone is worth more than their cap. The demand will comeback quicker than most of us think....
Demand for tourism and airline travel will be one of the last sectors that recover. Ditto Boeing.
@tony1969 Wrong - see my previous posts. You are gambling buying the common stock, it's called "common" for a reason.
Nettligent profile picture
It is unnecessary to bet against Boeing. Boeing is in the eye of the storm. Current Boeing executives and Board of Directors + GE culture destroying Boeing from within for many years. The global coronavirus epidemic bringing out the worst in Boeing. CEO David Calhoun, Board of Directors, Engineering managers, MBA employees, Unions must go for new management with integrity and intelligence before it is too late.
Boeing has been uniquely impacted by the pandemic and a deeply disturbing future: the economic recession, toxic monkey management, clown MBA designers, engineering development in India, minions union, growing massive $100 billion in debts by 2021, wasteful spendings on reckless stock buybacks and dividend payments, impotent FAA regulators, the lack of travel and worthless airplanes waiting for resurrection in a foresee future.
The coronavirus pandemic has devastated the airline industry. U.S. air travel has dropped 95% compared to last year and the number of flights scheduled globally is down by 63%. Airlines have grounded more than 16,000 worthless Boeing planes waiting for resurrection in the foreseen future. Boeing and its shareholders will face a nightmare for years to come.
The U.S. government and taxpayers will bailout Boeing.
Boeing needs to move fast before the U.S. Presidential Election on November 3, 2020.
Looks like you would have loved the Chinese bailing out Boeing !!!!
Nettligent profile picture
@drsatyas Despicable Boeing, GE, Southwest, and airlines using their employees, strategic position, and China as bargain chips to get free money from the Fed and American taxpayers. Soon they will be cutting their employees anyway.
Boeing, GE, Southwest, and airline companies are in crisis: undergoing massive layoffs, posting record losses, and is pushing companies on the brink into bankruptcy. Just because a company files for bankruptcy doesn't mean it will cease to exist.
These vulnerable companies need to have new management, the Board of Directors, and the Union with intelligence and integrity.
Companies use bankruptcy to shed debt and other liabilities, including money that they owe vendors. They can also use it to void contracts they can no longer afford, including labor deals and leases on the property.
They can close locations or units of the company that can't be saved. Many companies that file for bankruptcy go on to be profitable under new management.
Many other companies that file for bankruptcy intending to stay in business fail to get court approval of their turnaround plans and go out of business. And even some companies that are able to emerge from bankruptcy are forced to file again in the future and eventually go out of business.
You mean in case Trump wins? Biden would write Boeing a blank check. Trump likely will as well. Your critique, however accurate, shows that capitalism itself is broken. Today it weakens a nation instead of strengthening it....it works to enrich a few and taxes the majority to pay for it. If Boeing fails, it fails. In a true market, the assets should be quickly liquidated so the airplanes can keep rolling off the lines. Boeing shareholders should take the resulting haircut. Moral hazard.
Airbus has better financial health than BA

I think the main difference is that Airbus has several latest-generation 737-sized aircraft available to sell to airlines once this is over. The 737 MAX is parked in the desert and at airports the world over. That's an extra, *massive* headwind for BA.
Wake me at 75.00....seriously
Cylontymany profile picture
Agreed!!! Lol
Buffett did not invest in BA but we do not know if there were any talks. There could easily have been but perhaps his terms were too much for BA so they decided on the debt. I think that they 100% did the right deal. Im a buyer here...
@tony1969 I hope you are referring to buying secured debt, anything else is financial suicide.
He could have gone with some preferred stock and warrants as he did with the $5 billion he gave BAC back in the financial crisis. I think the debt offering was perfect especially if they dont use it all...
Boeing, I wouldn't touch. Slow moving, bloated and very poorly managed company before Corona.

While there were so many negative SK articles about Tesla and Netflix also, they were all wrong, because they bet against innovation, aggressive growth and disruptors. Competition got Amazoned, this is normal.
Poor management, agitated unions, Covid-19, looks like a winner for Boeing.
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