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The Difficulties for Boeing Stock Are Priced In

Mark R. Hake

Boeing (NYSE:BA) stock is up slightly since July 24 when it reported its second-quarter earnings, that included a $5.7 billion charge to revenue and an $8.74 hit to its earnings per share from the 737 Max issues.

The Difficulties for Boeing Stock Are Priced In

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Boeing’s stock performance seems to indicate it has already taken into account the worst that will happen. I tend to agree and believe Boeing stock is likely undervalued here.

Here is what the market has already baked in the price:

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  • BA’s operating flow was negative for the quarter and its free cash flow, after all capital expenditures, was -$1 billion. This stems from BA’s lower production rates on the 737 Max 8. And these will continue.
  • Management believes the 737 Max plane will resume flying by the end of the year, although the new FAA chief has not made any such commitment. It is likely that the plane won’t get off the ground flying by the end of Q1 2020.
  • The market seems to be pricing in BA stock a resumption of major orders by the end of the year. Some analysts are now saying it could take until the end of Q1 2020 before the plane is flying again.

Going Contrarian on Boeing Stock

Other analysts are saying the market is focusing too much on the 737 Max issues. The rest of its aerospace and defense businesses are very healthy. And a $1 billion loss in free cash flow is easily absorbed by the company.

As of June 30, Boeing had total cash and securities of $9.6 billion. BA was able to raise $5 billion in additional debt to cover its losses while keeping the Max 737 production line running and expected payouts related to the two 737 Max crashes.

One analyst at Jefferies recently told CNBC she believes Boeing stock is worth $420 per share, based on its sum-of-the-parts valuation and her belief that the 737 Max 8 plane will eventually pick up large orders sometime next year.

That would mean BA’s stock price would rise about 16% from its present price range of about $362 per share. But that might take a year or so.

Dividends and Buybacks Are Continuing

It’s also important to point out here that Boeing is still paying its dividend, which yields 2.28%. The total dividends paid to investors in the first six months of 2019 cost Boeing $2.3 billion according to its latest report. So annually that would cost BA about $4.6 billion,

Incredibly BA is still buying back its shares, although it lowered the pace of buybacks in Q2 to just $310 million from $2.34 billion in the Q1.  This shows the company believes its stock is undervalued and that it will have the liquidity to cover its dividends and a lower buyback program.

Worst Case Scenario

For example, let’s look at a worst case situation where the 737 Max does not fly for another year, and production and orders do not increase for 12 months. If the $1 billion quarterly free cash flow losses continue for even one more year, and the dividends and buyouts continue at their same pace as in the first half of this year, the total cash drain would be:

  • $4 billion in free cash flow losses
  • $4.6 billion in dividend payments
  • $1.2 billion in buyback spending
  • $9.8 billion total cash drain

Considering that Boeing has $9.6 billion right now, it would likely have to increase its debt above its present $19. 2 billion level right now. But BA has $126 billion in assets that could act as collateral or be sold to cover this worst case situation. Moreover, if it had to, Boeing could easily sell equities or convertibles to raise additional funds. So the company has sufficient liquidity to weather this crisis.

This would not cover issues relating to payouts for the two crashes. But I believe BA stock has probably has insurance reserves for that on top of what it already has set aside.

What This Means for BA Stock Investors

Right now the stock trades a forward price-earnings ratio of 19 times analysts’ estimates, with a 2.28% dividend yield. Boeing appears to have plenty of liquidity to cover even a worst case situation of the 737 Max not flying for another year. I have shown that some believe the stock is worth a good deal more than its present price when the 737 Max issues are resolved. BA stock looks like a good bargain here.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can look at here.

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