The Boeing Company (NYSE: BA) may be managing to do something that seems counterintuitive. Again, “may be.” Its stock is trying to stabilize and even recover right in the middle of a truly awful news cycle. Billions in losses, blood on its hands, a strike, layoffs and plane delays and cancellations. How could an emerging “strategic investment” case be brewing with so much bad news?
Oggonomics tracks many emerging ideas and ongoing situations that may be attractive for short-term traders and long-term investors alike. Where Boeing fits in at this point, or if Boeing even fits in strategically at all, is a decision that is going to have to made by each investor and their own advisors. That said, something interesting appears to be happening on what might normally send most investors running for the hills.
It is hard to imagine that Boeing’s market capitalization is down to $91 billion. That’s it though. And Boeing no longer pays a dividend. When that will change is anyone’s guess (maybe years). And the only really good thing for new CEO Kelly Ortberg after a series of internal shuffles is that the slate is clear and they basically get to announce almost anything including the proverbial “even throwing out the kitchen sink.”.
MORE CAPITAL COMING!?!
First and foremost, credit ratings agencies have warned that Boeing’s negative cash flow and dwindling cash are a problem. It may even cost the company its investment-grade credit rating (how are they not junk yet?). Boeing has filed a shelf registration statement with the SEC that would allow up to $25 billion to be raised in new capital. This can be in the form of equity, debt and/or other classes of securities (preferred, warrants, convertibles, etc.).
An open shelf registration does not have to mean a capital raise is coming tomorrow. What it does do is allow Boeing to engage investment banks to begin generating interest in accessing that new capital. And with the pre-earnings warning and other news that was issued it may be needed sooner rather than later. Boeing also has more than $10 billion in debt maturities coming due over the next 18 months. This is on par with the $10.9 billion Boeing had on hand at the end of June.
ACTUALLY, SOME CAPITAL IS ALREADY COMING
Boeing has secured a new $10 billion line of credit to shore up its finances. The credit line was led by the likes of BofA, Citi, Goldman Sachs and JPMorgan. This will allow Boeing to operate at least financially without restrictions while the 30,000 striking employees in the Northwest want more despite Boeing’s woes.
And on that shelf registration mentioned above, that would historically have been considered dilutive by most counts. That said, new capital may save the day and there has been much speculation (if not outright anticipation) that a large capital raise was coming.
THE LATEST WOES
Boeing’s latest woes are far beyond its new plane designs that led to two deadly plane crashes. They are even beyond the emergency-door plug breaches in the 737 MAX 9 and design issues that has slowed production and brought in more oversight. It is ending production of the 767 freighters. Boeing has in recent days warned of multi-billion losses (around $5 billion after charges) and a memo to employees ahead of the layoffs talked about a realistic expectation that a turnaround is going to be a long haul rather than a quick fix. By cutting 10% of its global workforce the company will be able to save cash even if it ends up having to pay out more to its workers. Boeing is also delaying the first deliveries of its 777X plan by a year.
Boeing’s $5 billion (or so) in charges is broken down as $3 billion for 777X and 767 planes and $2 billion for Defense, Space & Security. This should outline the new CEO’s message about Boeing’s turnaround not having any quick and easy fixes:
We need to be clear-eyed about the work we face and realistic about the time it will take to achieve key milestones on the path to recovery. We also need to focus our resources on performing and innovating in the areas that are core to who we are, rather than spreading ourselves across too many efforts that can often result in underperformance and underinvestment.
HOW WALL STREET IS REACTING
Boeing’s shares were barely down 1.3% at $148.99 on Monday after the news of losses, job cuts, plane cancellations and plane delays was digested over the weekend.
Here is how some of the analysts reacted:
- BofA Securities made no change to its $170 price objective and Neutral rating, but its keynote view is that the pre-release was mostly worse than you thought and that its turnaround has a long road ahead.
- CFRA reiterated its Sell rating and cut its target to $131 from $151 after widening its EPS loss target for 2024 and lowering earnings estimates for 2025/26 and noting that its cash position is a concern and that its cash flow was negative.
- JPMorgan maintained its Overweight rating but cut its price target down to $195 from $235 based on the projected length of a recovery time frame.
- Seaport Global went as far as issuing 3 reasons to buy Boeing (Buy rating and $207 target) — the bad news looks priced in, compelling valuations, and the catalysts of a capital raise mixed with an eventual end of the strike.
- TD Cowen maintained its Buy rating while trimming its target to $190 from $200.
- UBS still has a Buy rating but it trimmed its target to $215 from $220.
- Wells Fargo remains among the most negative in the coverage universe after the pre-announcement, reiterating its Underweight rating and cutting its target to $2109 from only $110.
WHAT ABOUT SPIRIT?
Boeing is in the midst of reacquiring Spirit Aerospace Holdings Inc. (NYSE: SPR). The deal comes with an equity valuation of $4.7 billion and an enterprise value (debt and stock) of $8.3 billion. By integrating Spirit and Boeing together, the hope is to get more from the manufacturing and engineering capabilities like safety and quality.
One issue to consider is that Boeing’s transaction has a stock “collar” in the terms. It is calculated as $37.25 divided by the volume weighted average share price and is subject to a floor of $149.00 per Boeing common share and a ceiling of $206.94 per Boeing share. The acquisition terms stated:
- Spirit shareholders will receive 0.25 shares of Boeing common stock for each of their shares of Spirit common stock if the closing price is at or below $149.00;
- and they will receive 0.18 shares of Boeing common stock for each of their shares of Spirit common stock if the closing price is at or above $206.94.
Investors do have to keep in mind that the completion of the divestiture of the Airbus businesses by Spirit and is subject to other closing conditions. This included shareholder approval and necessary regulatory approvals. The timeframe issued was mid-2025.
TIME TO THINK LONG-TERM?
One of the hardest parts of investing is knowing when to invest when there is nothing but bad news. It takes courage and financial strength to be able to buy a stock when the news is as bad as things sound and look at Boeing. Even its defense business is considered to be ailing now.
A strategic investors looks for upsized gains wherever they may be found. If it is in ailing aerospace and defense stocks, then that’s where it is. If it is chasing A.I. stocks or emerging tech stocks to the moon, then that’s what works. And if it is buying gold or bitcoin, that’s fine too.
In no way should this reporting on Boeing now be considered a recommendation to buy, hold, sell or short sell Boeing. In fact, some investors are prohibited from even being able to buy Boeing under its current clouds. And on the bright side, as impossible as it may seem, Boing could always decide one day that it’s time to make its plane and its warfare/defense operations independent of each other.
It’s interesting to see when stocks begin to hold their own and then even start to rally on what would otherwise historically be bad news. This is one of those times when strategic investors might have to also be willing to be special situation investors.
