Market Overview
The problem with Boeing, Part 2
As we teased last month, Boeing (NYSE:BA) provides us with too many issues to cover in just one article. Having focused on the quality issues that blighted America’s premiere aircraft maker, we now turn to what else Boeing needs to worry about, how it can address those issues and what investors can do if the executive team can’t correct course.
Boeing’s problem with loose or missing bolts on its workhorse 737s is already reflected in the stock price, down around 30% year-to-date. Believe it or not, that’s not soon-to-be-former CEO Dave Calhoun’s biggest headache.
From the shop floor to the C-suite
Not least among those headaches is who’s going to succeed him. Calhoun promised to step down at the end of 2024, but that’s still a long way off and nobody knows for certain who’s going to take over. He told investors that he had an internal candidate in mind – and you can understand why this wasn’t the answer many of them were looking for. When this much housecleaning is required, the prevailing opinion goes, you need a new broom.
“New leadership at Boeing is important not just in the context of the short-term as the company works through its production challenges, but even more in the long-term,” according to a recent Morgan Stanley research note. “The next leader of Boeing will likely lead the company through its next aircraft development program in which success is essential to set the company on sound footing for the future.”
That’s hardly the only concern Morgan Stanley analyst Kristine T. Liwag has. She also cites such issues as:
- Slowdowns in 737 deliveries,
- Supply chain issues interrupting production of the wide-body 787 Dreamliner,
- The 30,000 union machinists in Washington state who could walk off the 737 line in September if they don’t get a 40% raise,
- Federal Aviation Administration eyeballing all of Boeing’s operations in the wake of the 737 mishaps, and
- Higher cost of capital if rating agencies continue to downgrade the company’s bonds, which are now just one step above junk bond status.
Liwag didn’t mention – because she didn’t have to – that competitors are salivating at the prospect of some combination of these factors spelling the end of Boeing.
The 30,000-foot view
Boeing might dominate the airliner niche, but it’s part of a broader sample. Conventionally, we classify all U.S. businesses into 11 sectors, each of which consists of several industries. Boeing lives in the Aerospace & Defense industry within the Industrials sector. Compared to other A&D players, it’s in a three-way virtual tie with Lockheed Martin and RTX, formerly Raytheon.
These rivals, though, focus more on selling to the Pentagon and to NASA. They’re not the ones Boeing would lose market share to. That competition comes from abroad.
Boeing has long dueled with Europe’s Airbus, but another scrappy player is Brazil’s Embraer. It’s long associated with regional jets but we’re kidding ourselves if we don’t think Embraer sees an opportunity here. Same could possibly be said for the business jet makers.
One issue Boeing faces that other commercial airliner manufacturers don’t is its exposure to the BDS – for “boycott, divestment and sanctions” – movement. While other A&D companies are either A or D, aerospace or defense, The Motley Fool points out, Boeing has it both ways. We are now in a moment – regardless of our views on the issues involved – when many fund managers feel pressure to unload stocks of companies their investors might find “problematic”.
Even so, Boeing really is problematic. Regardless of how its defense division’s activities play on college campuses, it’s in a cutthroat market, it misses its production marks and as a result misses its sales marks. Its workers are preparing to strike, it poses a growing credit risk and – we almost forgot – it recently earned a reputation for shoddy merchandise. And yet, the stock has its fans. Out of 25 equity analysts following it, 15 have it as a “buy”. (Morgan Stanley, as you’ve no doubt guessed, is one of the other 10.)
We need to make sure we’re not conflating Boeing’s woes with the A&D industry’s overall outlook, which is rosy. On the defense side, a recent Forbes article points out just how much conflict is breaking out throughout the world right now, and how much new tech can be brought to bear. We wouldn’t call it good news, but it is an accretive investment thesis.
Plenty of opportunity exists on the commercial side, too.
“The international and domestic revenue passenger kilometers are expected to recover to pre-pandemic levels in 2024,” according to Deloitte. “This could result in increased demand for new aircraft orders. ... Commercial spending is likely to be focused on digitalization, new product development, and more broadly on future-facing subsectors such as AAM and space.”
AAM, or advanced air mobility, refers to some cool stuff NASA is developing that will enable commercially viable flights at lower altitudes and shorter durations. Not quite flying cars, but along those lines. Commercial space travel, meanwhile, is rapidly becoming routine; all we need is someplace in space to go.
Someday, you’ll be able to buy a ticket to the moon. But if your luggage ends up on Mars, it’ll take about nine months to catch up with you.
And as if Boeing didn’t have enough problems in the troposphere, its vaunted Starliner spacecraft’s first crewed voyage was scrubbed on the launchpad May 6. As of this writing, it is still awaiting a new launch window.
To the moon?
The failures or successes of individual companies, though, might not represent an entire industry. We should note in passing that RTX is having its own struggles and should send Boeing a thank-you note for hogging all the attention.
Very different factors drive defense stocks as opposed to aerospace stocks.
While aerospace hinges on the fuel economy and overall economic strength, according to Morgan Stanley, defense stocks tend to surge during Republican administrations but underperform during Democratic ones. Still, this year could be the exception because of the bipartisan support for three separate appropriations bills to militarily support Ukraine, Israel and Taiwan.
To get a sense of which companies are playing in which niches, or whether you should invest in an A&D industry fund, you might want to sit down with a trusted financial advisor.
