Boeing (NYSE:BA) was hammered on multiple fronts last year as ongoing issues with the controversial 737 Max passenger jet lingered and the novel coronavirus pandemic punished Boeing stock, making it one of the worst-performing names in the Dow Jones Industrial Average.
The prior year wasn’t a picnic, either. The aerospace and defense giant shed nearly a third of its value amid concerns that the company didn’t adequately address safety flaws with the 737 Max. These flaws led to a pair of fatal crashes. Then the novel coronavirus hit, stoking some speculation about Boeing’s survivability. The company was forced to suspend its dividend and borrow tens of billions of dollars.
As of the end of the third quarter, Boeing’s debt-to-equity ratio was -5.157x. And the company carries $172.8 billion in liabilities against $161.26 billion in assets, meaning shareholder equity is -$11.82 billion. Rival companies, such as Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD), have positive debt-to-equity ratios.
Still, BA stock is up 137.11% from its March 2020 trough. Investors are increasingly comfortable wagering the worst of the 737 Max and coronavirus crises are behind the company. Maybe. Maybe not. Either way, investors speculating that a rebound in cyclical stocks will help Boeing should examine threats to recovery.
737 Max Not the Only Threat to Boeing Stock
After the 737 Max was grounded for all of last year, recent news pertaining to the plane is decent. American Airlines (NASDAQ:AAL) is using the jet on its Miami-to-New York route.
Sounds good, right? Indeed, it’s a step in the right direction for Boeing. Digging deeper, investors will find American took delivery of 34 737 Max planes, only six of which were activated. The good news is American says there’s no evidence suggesting passengers won’t book travel on the 737 Max. Also, bookings for that model are comparable to those of other planes in the American fleet.
The bad news is that the 737 Max isn’t the only passenger jet Boeing makes. This means it’s not the company’s only problem. Though not nearly as controversial as the 737 Max, Boeing’s 787 Dreamliner jets have costly design flaws that are hindering deliveries.
In the last two months of 2020, Boeing delivered just one 787 Dreamliner. Bernstein analyst Douglas Harned, who rates BA stock the equivalent of a “sell,” said those issues could crimp the company’s free cash flow by $7.5 billion this year. Reduced free cash flow is not what investors want to hear when it comes to a heavily indebted company like Boeing.
“The problem we see is that the 787 situation is getting worse and we are not yet able to fully bound the negative impact,” Harned said in a recent note to clients.
Devil in the Details
Boeing stock surged in November, likely a sign investors were growing enthusiastic about prospects for the 737 Max and coronavirus vaccines. Some of those gains were given back in December and more of the same could be on the way during 2021 .
Boeing sat on a record $75.2 billion of inventory at the end of the third quarter, according to Bloomberg. Even if some 737 Max’s return to the skies, the Dreamliner issues could keep that number uncomfortably high.
Additionally, not all airlines are racing to get the 737 Max flying again. For example, Southwest Airlines (NYSE:LUV), which relies on several models of the 737, has not added the jet back to its airliner fleet.
That alone isn’t an indictment of Boeing stock, but the overall condition of the airline industry, one weakened by the pandemic, is.
Scrambling to conserve capital and avoid taking on more debt, airlines have every incentive to refurbish older but still safe models rather than invest in new jets. Also, the airline industry is facing a recovery timeline of perhaps at least two years. Combine these issues and apprehension is warranted with Boeing stock at current levels.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
