On the surface, Boeing(NYSE:BA) looks like it has all the ingredients of a potential millionaire investment. The aircraft market is growing, competition is minimal, and government contracts are plentiful. But despite its many assets, this aerospace leader has lost 60% of its value in half a decade. Has this decline created a buying opportunity for this once-stellar company, or should it be taken as a warning to investors to stay away?
The expression « economic gap« — popularized by investing legend Warren Buffett – refers to certain types of sustainable competitive advantages that a company can possess who do it is difficult for potential rivals to assert themselves against him. Boeing’s moat is as deep as it gets. On the large aircraft market, it has a duopoly with its European rival. Airbuswith a market share of around 40% for large aircraft (compared to 60% for Airbus). It also plays a notable role in US defense contracts, supplying weapons systems such as the iconic Apache helicopter.
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Investors shouldn’t expect the duopoly to end anytime soon. The large jet manufacturing industry has an incredibly high level barrier to entry due to capital investment requiredd, intense regulatory oversight and commercial relationships between manufacturers and major airlines which may be reluctant to experiment with new suppliers.
During the very In the long term, a Chinese rival like COMAC could benefit from lower labor costs and support from Beijing. government to impose itself in the industry. But the International Bureau of Aviation (IBA) expects new entrants to capture only about 1% of opportunities by 2030. With potential disruption in the industry decades away, Boeing the biggest the threat could be itself.
Boeing’s third-quarter revenue fell about 1% year-over-year to $17.8 billion, with results hurt by the commercial aircraft segment, where sales fell 5% to 7 .44 billion dollars. This core business was struggling with a crowd of issues, including a seven-week strike by the International Association of Machinists and Aerospace Workers (IAM) that ended this month.
New contract calls for a 38% pay increase for workers over the next four yearswith more generous pensions, putting even more pressure on this loss-making activity. As a reminder, Boeing’s commercial aircraft segment generated a third quarter operating loss of $4 billion, so higher labor costs are probably the last thing shareholders want to see right now.
Image source: Getty Images.
Just weeks after signing the new IAM contract, federal documents revealed that Boeing would lay off 2,200 workers across the United States. This decision will probably be the first salvo in its plan to cut 10% of its global workforce (17,000 jobs) announced during the October strike. As a mature, slow-growing company, aggressive cost cutting will help Boeing maximize long-term shareholder value.
More importantly, the company will need to increase its production volume to take advantage of economies of scale. But that might be easier said than done because Boeing is already struggling with quality control issues according to the FAA.
In the best-case scenario, Boeing will be able to reduce costs and streamline operational profitability while avoiding future labor disruptions related to work on its production lines. But even if the company succeeds, it will face a mountain of $53.2 billion in expenses. long-term debt on its balance sheet. Removing these debts will deplete its cash flow, limiting potential returns for investors.
In the third trimester alone, Boeing’s interest expense was about $2 billion. And as an aircraft manufacturer, it is also facing massive outflows of funds for research and development (around $3 billion in the first three quarters of this year alone). Iit will be difficult cut these development expenses without exposing the company to the risk of falling behind technologically.With all this in mind, Boeing appears to be far from a potential millionaire manufacturer title.. Instead, he will likely underperform S&P500For the foreseeable future.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
