Don’t Expect Boeing to Rise Without a Big Change

Stocks to sell

Boeing (NYSE:BA) is not in a good place, and BA stock is not going to rise anytime soon if the company doesn’t turn things around.

Biases Obscure the Strong Long-Term Bull Case for Boeing Stock

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Boeing reported huge first-quarter losses, cut its dividend, and more importantly, suggested that its FCF losses will continue. For example, its operating cash flow loss was negative $4.3 billion, and the related FCF loss, after capex spending of $428 million, was negative $4.73 billion.

Cash Burn Is Greater Than Liquidity

Here is why that is dangerous. If Boeing keeps this up over the next year, its cash drain will be $18.9 billion ($4.73 billion times four). Boeing said in its press release that its current cash was only $15.5 billion.

Moreover, the company was very vague about its liquidity options. Here is what the company said:

“Access to additional liquidity will be critical for Boeing and the aerospace manufacturing sector to bridge to recovery, and the company is actively exploring all of the available options. Boeing believes it will be able to obtain sufficient liquidity to fund its operations.”

I don’t know about you, but to me, that means the company is willing to consider a dilutive common stock capital raise. That is what “all of the available options” may mean.

BA Stock Is Likely To Be Much Lower As Losses Continue

If that occurs, expect BA stock to be a lot lower than where it is today. First of all, the company has a negative book value. Shareholders’ equity at the end of Q1 stood at negative $9.65 billion. Boeing has been this way since Q2 of last year, when the losses related to the 737 MAX crashes and production delays started to pile up.

Second, its ongoing debt is over $58 billion. If the company had to take on additional debt, the stock price would not be in an ebullient mood. Let’s think about this.

For example, let’s say that Boeing runs two more quarterly FCF losses of close to $5 billion, as it did during Q1. That would lower the existing cash balance to say $6 billion. Investors in BA stock would likely push the stock much lower to take on the additional potential solvency risk.

An Equity Capital Raise Would Hurt BA Stock

But on the other hand, Boeing could raise permanent capital in the form of common stock or convertible preferred stock. But investors would want a bargain. Typically the discount is at least a 20% discount to some form of value.

So even from $120 per share, where BA stands today (May 15), a 20% discount would take the stock to just $96 per share. And that is just an estimate. There may be only a 30% to 40% chance the stock would be at that level.

Why Am I So Negative About Boeing?

Even Boeing’s CEO this week made a statement that it would take two or three years before the public would be comfortable with air travel. Can Boeing really last that long?

The company makes a big point about its huge backlog of airplane orders. But airliners may falter and some will cancel their orders. If air travel doesn’t pick up over the next year, that will be the reality for Boeing.

For example, in March customers canceled 150 planes. This past week the company said 108 more planes were cut by airliners in April. CNBC reported that this takes the company’s order backlog to below 5,000 planes.

That is not going to be good for the company’s ongoing cash flow. It also is not going to put to bed questions of whether Boeing is too big to fail.

Barron’s recently addressed that issue, which they call TBTF (too big to fail). They pointed out that bankruptcy would not be the end of the company, just a reorganization. It is not unheard of for such a large company. One analyst the company quoted suggested that it might be to the company’s advantage to simply halt airplane production.

In any case, I suggest that investors in BA stock be very careful. So far, I cannot see any type of margin of safety in the stock. There are no hidden assets, no turnaround plan that might work, and no potential unforeseen positive catalysts.

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 Guidewhich you can review here.

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