Could Boeing Potentially Fashion Millionaire Fortunes?
At first glance, Boeing (BA, up 2.77%) appears to have all the components of an investment that could make a millionaire. The market for aircraft is expanding, competition is limited, and government contracts are abundant. However, in the past half decade, this aerospace titan has lost sixty percent of its value. Is this decline an investment opportunity for this once-thriving business, or should investors steer clear considering it a warning sign?
An Unassailable Economic Fortress
The term "economic moat," popularized by investing legend Warren Buffett, refers to competitive advantages that a company possesses, making it challenging for potential competitors to challenge its position. Boeing's moat is as formidable as they come. In the vast market for large passenger aircraft, it competes in a duopoly with European rival Airbus, holding a market share of approximately 40%. In addition, the company plays a key role in U.S. defense contracting, supplying weapons systems such as the renowned Apache helicopter.
Investors should not expect this duopoly to crumble anytime soon. The manufacturing industry for large passenger jets has an extremely high threshold for entry due to the capital investments required, stringent regulatory surveillance, and the unwillingness of major airlines to experiment with new suppliers.
Although a Chinese competitor like COMAC could potentially utilize lower labor costs and government support to penetrate the market, the International Bureau of Aviation foresees the upstart capturing only around 1% of the opportunity by 2030. Given the distant prospect of industry disruption, Boeing's most significant threat may well come from itself.
Can Cost-Saving Measures Turn the Tide?
In the third quarter, Boeing's revenue saw a slight decrease of approximately 1% year-over-year to $17.8 billion, primarily due to a decline in its commercial airplane segment, where revenues dropped 5% to $7.44 billion. This critical business sector was grappling with various challenges, including a seven-week strike by the International Association of Machinists and Aerospace Workers (IAM), which concluded this month.
The new contract includes a 38% wage increase for workers over the next four years coupled with more generous retirement benefits. With heavy losses already in the commercial Airplane segment – a third-quarter operating loss of $4 billion – these increased labor costs are unlikely to please shareholders at this juncture.
Just weeks after the IAM contract, Boeing announced layoffs of 2,200 employees across the US, marking the first wave of its plan to reduce its global workforce by 10% (17,000 jobs). As a mature and slow-growing company, aggressive cost-cutting is crucial to maximizing shareholder value over the long term.
Crucially, Boeing must also boost production volume to capitalize on economies of scale, but this could be more challenging given the company's existing struggles with quality control issues, according to the FAA.
Avoid Boeing at All Costs
In the most optimistic scenario, Boeing manages to slash costs and streamline its way back to profitability without encountering any further labor-related disruptions in production. Even if the company succeeds in achieving this feat, its colossal $53.2 billion pile of long-term debt would spell trouble for its cash flow, limiting investor returns.
In the third quarter alone, Boeing's interest expenses totaled around $2 billion. As an aircraft manufacturer, it also faces substantial outlays for research and development (approximately $3 billion in the first three quarters of this year). It will be challenging to reduce research spending without jeopardizing the company's technological edge. Consequently, Boeing appears a long way from being a lucrative investment opportunity. Instead, it is set to underperform the S&P 500 in the foreseeable future.
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Despite Boeing's financial struggles, some investors may see its current situation as an opportunity for investing, hoping to profit from potential cost-cutting measures and eventual turnaround. However, considering the company's substantial long-term debt and the challenges it faces, it might be more prudent for many investors to allocate their money elsewhere, away from Boeing stocks.
