Boeing: Opportunities and Challenges in Investment

On the surface, Boeing (NYSE: BA) appears to have all the elements of a potentially lucrative investment opportunity. The aerospace industry is witnessing significant growth, competition among major players remains relatively low, and government contracts continue to be a reliable revenue source. However, in stark contrast to these seemingly favorable conditions, Boeing has experienced a staggering 60% decline in its stock value over the last five years. This begs the question: has this dramatic downturn created a hidden buying opportunity for the beleaguered aerospace giant, or should cautious investors treat it as a signal to maintain a safe distance?

A Deep Economic Moat

The term “economic moat” — a concept made famous by investing legend Warren Buffett — refers to the durable competitive advantages that allow a company to fend off competitors. Boeing possesses one of the most robust economic moats in its sector. Dominating the large passenger aircraft market, Boeing operates in a duopoly alongside its European rival, Airbus. With a market share of nearly 40% compared to Airbus’s 60%, Boeing has positioned itself as a formidable player. Furthermore, the company is a significant participant in U.S. defense contracting, supplying essential weapons systems such as the renowned Apache helicopter.

Investors can rest assured that this duopolistic market structure is unlikely to change anytime soon. The hurdles for new companies aiming to enter the large passenger jet manufacturing industry are exceptionally high, which include enormous initial capital requirements, rigorous regulatory scrutiny, and existing long-term relationships between major manufacturers and airlines, which are typically hesitant to switch suppliers.

While it is true that a rival such as COMAC from China could potentially disrupt the market by capitalizing on lower labor costs and backing from the Beijing government, experts at the International Bureau of Aviation (IBA) predict that COMAC will capture a mere 1% of the market by 2030. Given the lengthy timeline for any potential disruption, Boeing’s most substantial risk may stem from internal challenges rather than external threats.

Could Cost-Cutting Lead to a Turnaround?

In the third quarter, Boeing’s revenue experienced a slight dip of approximately 1% year-over-year, arriving at $17.8 billion. This decline was primarily attributable to struggles within its commercial airplane segment, which saw sales decrease by 5% to $7.44 billion. The company’s core operations are dealing with several critical issues, including a disruptive seven-week labor strike led by the International Association of Machinists and Aerospace Workers (IAM) that recently concluded.

The newly established contract not only mandates a substantial 38% pay increase for workers over the next four years but also includes enhanced retirement benefits. This inevitably exerts additional pressure on an already struggling business. To provide some context, Boeing’s commercial airplane division recorded a staggering operating loss of $4 billion in the last quarter, making the prospect of increased labor costs particularly unwelcome for shareholders.

Shortly after the IAM contract was finalized, Boeing disclosed plans to lay off 2,200 workers across the United States. This layoff is likely just the initial step in a broader strategy to eliminate 10% of its global workforce, translating to roughly 17,000 jobs, as was announced during the recent strike in October. As a company that has reached a mature state with relatively slow growth, aggressive cost-cutting measures could provide Boeing with an opportunity to enhance long-term shareholder value.

However, it is crucial for the company to increase its production output to fully leverage the advantages of economies of scale. Achieving this is easier said than done, as Boeing is currently facing significant quality control challenges according to the Federal Aviation Administration (FAA).

Should Investors Steer Clear of Boeing?

In a best-case scenario, if Boeing successfully implements cost-cutting measures and streamlines operations towards profitability, it must also contend with a daunting $53.2 billion in long-term debt on its balance sheet. Addressing these liabilities would require substantial cash flows, which could, in turn, limit the potential returns for investors looking to profit from their investments.

The third quarter alone saw Boeing rack up about $2 billion in interest expenses, in addition to substantial outflows for research and development, approximately $3 billion during the first three quarters of this year. Reducing these R&D expenditures could place Boeing’s technological edge at risk, hampering its competitiveness in a rapidly evolving industry. In this context, Boeing might not fit the profile of a “millionaire-maker” investment as once thought. In fact, it seems poised to underperform compared to the S&P 500 for the foreseeable future.

Seize This Second Chance at a Potentially Profitable Opportunity

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*Stock Advisor returns as of November 18, 2024

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no positions in any of the stocks mentioned. For more details, please refer to The Motley Fool’s disclosure policy.

Is Boeing a Millionaire-Maker Stock? was originally published by The Motley Fool.

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