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Although not coined during the 2007-2008 financial crisis, the term “too big to fail” was used heavily at the time, as banks and multinational corporations were handed a lifeline in bailouts on account of their size. The term has been bandied about again recently, as Boeing (BA), one of the travel industry giants, is staring precipitously over the cliff’s edge.
Boeing shares are down by nearly 70% year-to-date, as investor concerns about liquidity have sent the stock price under $100 for the first time since 2013.
Along with the energy sector, travel has taken the heaviest punch since the coronavirus began decimating the market. Boeing has now requested $60 billion in federal assistance, which has raised the question whether the government will force the company into bankruptcy.
According to Merrill Lynch’s Ronald Epstein, this scenario is unlikely on account of two reasons: “(1) Boeing and its supply chain represent a critical industry for US economic growth and trade deficit reduction; and 2) Commercial Aerospace is a duopoly that needs to be supported long-term,” the analyst said.
Instead, quoting fellow BofA credit analyst Doug Karson, Epstein counts six possible outcomes: three of these are unlikely, and include a GM like bailout, a direct $60 billion loan and one which involves no action from the US government. Two further options are possible; the US government buys Boeing or a “loan with a mix of high coupon preferred.”
The most likely scenario, according to the analyst, is a $60 billion bailout in a mixed loan. Epstein explained, “We envision a bailout could be a mix of direct support for Boeing and a larger component of support for the supplier base. Of course we have no idea of the true size, but for illustration purposes, we can estimate $15bn for Boeing and $45bn for the supplier base. Under this scenario, $15bn of loans could be recourse to Boeing and sit on Boeing’s balance sheet. At year-end 2019, the pension-adjusted debt balance, pro forma for the new term loan, totaled $55bn. Prior to any government bailout, Boeing’s gross leverage, adjusted for pensions, was 3.7x, off of a 2019 EBITDA of $14.8bn. The $15bn government loan would increase leverage by 1-2x depending on how deeply EBITDA falls in 2020.”
So, from an investing point of view, is now a time to load up in the beleaguered airline’s shares? Not just yet. The analyst reiterates a Neutral rating on BA, while slashing the price target from $180 to $135 “on increased volatility.” From current levels, the upside still comes in at a healthy 29%. (To watch Epstein’s track record, click here)
Out on the Street, 5 Buys, 13 Holds and 1 Sell amount to a Hold consensus rating for BA. Significantly, though, the average price target is $235.16, and represents possible upside of a massive 123%. (See Boeing stock analysis on TipRanks)