The Federal Aviation Administration just capped a run of disasters for Boeing‘s (NYSE:BA) 787 Dreamliners by issuing an emergency airworthiness directive that grounds all U.S.-registered 787s until United Airlines (NYSE:UAL) — the only U.S. airline with Dreamliners in operation — and Boeing can demonstrate that its lithium ion batteries are safe.
The FAA’s move turns Boeing’s dream into a nightmare, and gives investors one difficult decision about whether now’s the right time to jump into BA shares.
So should you buy Boeing stock? Let’s look at the pros and cons to decide:
Cash Flow: Forget Boeing’s problems for the moment and instead consider its strong financial position. Sterne Agee analyst Peter Arment estimates that the airplane manufacturer will generate $18 billion in free cash flow over the next three years. Furthermore, there’s a good possibility that Boeing will be in a net cash position when it reports Q4 earnings Jan. 30. Assuming Boeing does hit that estimate, it will have approximately $4.7 billion annually (after paying dividends) to repurchase shares, repay debt and so on.
Pension: Boeing CFO Greg Smith said in November that it was considering shifting to a mark-to-market methodology when accounting for its pension obligations — a switch usually made in an effort to be more transparent with investors. Any gains or losses in the pension plan are recognized annually rather than being spread over several years. At present, Boeing’s underfunded pension liability is $15.5 billion, its biggest obligation by far. A decision on the accounting change is expected when it reports earnings. Although Boeing would have to restate its historical results, the move likely would increase its earnings per share in both 2013 and 2014.
Share Repurchases: Although Boeing has had four consecutive years of positive total returns, BA stock has been basically flat over the last 33 months. Given an especially lackluster performance in 2012, the likelihood of it spending some of that cash to buy back shares is extremely high. The last time Boeing repurchased shares in a big way was 2008, when it bought back 42.1 million at an average price of $69.79. While hindsight is 20/20, it could have picked up an additional 31 million shares for that money if it had waited until the end of that year and into 2009. Should Boeing’s stock run into some volatility as a result of the Dreamliner problems, it’s likely to be buying.
Dreamliner: Boeing’s latest safety issue is definitely not the elephant in the room. The news reports are everywhere. Industry experts were quick to categorize the spate of problems as nothing more than teething. However, as the BBC points out, problems have been found in at least five different parts of the plane. BBC News reporter Jorn Madslien quite rightly wonders how this could happen when the 787 Dreamliner’s inaugural launch was delayed by three years. It has to be worrisome to Boeing that with some 800 orders yet to be built and delivered, a lengthy grounding could result in significant order cancellations. At the very least, customers such as Qatar Airlines and All Nippon Airways (PINK:ALNPY) will likely seek compensation for being sold a bill of goods.
Potential Strike: Up until early this morning, it was looking highly likely that Boeing’s engineers — represented by the Society of Professional Engineering Employees in Aerospace — were going to head to the picket lines, putting a serious crimp in the company’s plans to deal with the 787 Dreamliner review. Fortunately, the union has proposed extending its current contract for another four years, with the agreed-upon portions of its current negotiations being rolled into the deal. It’s still possible that Boeing management could say no to the olive branch. If it does, despite its bravado to the contrary, it’s going to have a serious problem handling the technical aspects of the FAA review.
Pension: I know what you’re thinking — how can it be both a pro and a con? Let me explain. The mark-to-market methodology makes sense because it recognizes unusual gains or losses from pension investments in the year that they occur rather than being amortized over several years. The downside is that it increases the volatility of its earnings based solely on the whim of the markets — short-term pain for long-term gain. The real negative for Boeing is the fact it has $68 billion in total pension liabilities. That’s more than twice its retained earnings. What are the odds it’s going to be able to eliminate its underfunded pension status anytime soon? Slim to none.
Although the current issues with the Dreamliner are a serious distraction Boeing doesn’t need, I’m sure it will get through this period of uncertainty. As for the pension, it’s not something new for the company; it will muddle through.
At the end of the day, its free cash flow generation combined with a dividend makes Boeing an excellent long-term buy.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.