Thematic evaluation
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The Boeing Co. (BA)

October 17, 2024

Compared to: General Dynamics Corp. (GD) | Airbus SE (AIR) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

Despite significant operational and financial challenges, Boeing's current valuation appears moderately undervalued. The company's EV/Sales ratio is significantly lower than the industry average, suggesting potential upside. Additionally, the robust long-term demand outlook for commercial and defense markets, coupled with potential catalysts like the resolution of 737 MAX issues and successful integration of Spirit AeroSystems, provide substantial growth opportunities that may not be fully reflected in the current stock price.

Key takeaways
  • Boeing is facing significant operational and financial challenges stemming from quality control issues with the 737 program, which have led to production slowdowns, delivery delays, and customer considerations that are adversely impacting revenues, costs, and cash flows.
  • The company's liquidity position is weakening, as evidenced by the decreasing cash and short-term investments and the increasing accounts receivable.
  • The company's long-term solvency is under pressure due to the increasing debt levels and the decreasing equity.
  • The company's profitability is declining, with all profitability ratios showing a loss in the most recent quarter.
  • The company's high leverage is a significant solvency risk.
  • The company's cash flow is decreasing, driven by challenges in managing working capital and the impact of the 737 MAX grounding.
  • The company is investing heavily in new aircraft programs and facilities, but the returns on these investments are uncertain.
  • The company is confident in the long-term fundamentals of the commercial and defense markets it serves.
  • The company's valuation is currently depressed due to its recent financial performance and the challenges it faces.
  • The company's stock price has significantly underperformed its benchmark and peers, reflecting investor concerns about its financial health and future prospects.
  • Overall, BA's investment profile is characterized by high risk and uncertain growth potential. Investors should carefully consider these factors before making any investment decisions.
Undervalued
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Evaluation summary

  1. Company Overview:

    • The Boeing Co. (BA) is a global aerospace company with a diversified business model encompassing commercial airplanes, defense, space, and security systems, and global services.
    • BA's primary products include commercial jetliners like the 737, 767, 777, and 787, as well as military platforms such as the F-15, CH-47 Chinook, and V-22 Osprey.
    • BA's target markets include commercial airlines, the U.S. government, and international defense and space agencies.
    • We will be comparing BA's performance to the Technology Select Sector SPDR Fund (XLK) as a benchmark and to industry peers General Dynamics Corp. (GD) and Airbus SE (AIR).

  2. Financial Performance:

    • BA's revenue has been declining in recent quarters, primarily due to lower commercial delivery volume, impacted by the 737 MAX grounding and production slowdowns.
    • The company has reported net losses in recent quarters, indicating a significant decline in profitability.
    • BA's profitability is significantly lower than the industry average, with all profitability ratios showing a loss in the most recent quarter.
    • BA's Return on Average Assets (ROA), Return on Average Total Equity (ROE), and Return on Average Invested Capital (ROIC) have been declining, indicating a decline in asset utilization efficiency and profitability.
    • Compared to its peers, BA has consistently underperformed GD and AIR in terms of profitability and return metrics.

  3. Operational Efficiency:

    • BA's working capital management has been a challenge, with increasing inventories and accounts receivable, suggesting potential inefficiencies in asset utilization.
    • The company's cash flow has been decreasing, driven by challenges in managing working capital and the impact of the 737 MAX grounding.
    • BA's free cash flow has been negative in recent quarters, indicating a significant cash outflow.
    • The company is investing heavily in new aircraft programs and facilities, but the returns on these investments are uncertain.
    • BA's capital expenditure has been high, but depreciation trends have not kept pace, suggesting potential challenges in asset management.
    • BA's short-term liquidity position is weakening, with the Quick Ratio indicating a potential short-term liquidity issue.
    • The company's long-term solvency is under pressure due to increasing debt levels and decreasing equity.
    • BA's debt-to-equity and leverage ratios are significantly higher than the industry average, indicating a high level of financial risk.
    • Compared to its peers, BA has shown lower operational efficiency, with higher working capital requirements and lower free cash flow generation.

  4. Growth Opportunities:

    • BA is targeting market expansion in the commercial and defense markets, with a robust demand outlook for its products.
    • The company's acquisition of Spirit AeroSystems is a strategic move to unify its safety and quality management systems and improve manufacturing efficiency.
    • BA's R&D pipeline includes new aircraft programs like the 737-7, 737-10, and 777X, with the 777-9 receiving type inspection authorization and beginning certification flight testing.
    • The company is focused on geographic expansion, particularly in emerging markets with high growth potential.
    • BA's capital allocation strategy prioritizes investments in safety, quality, and supply chain stability to ensure a more predictable and stable ramp-up in production.
    • Management's historical execution of strategic plans has been inconsistent, with challenges in managing complex programs and achieving expected returns on investments.

  5. Risks and Threats:

    • BA faces significant risks related to the 737 MAX grounding and production slowdowns, which have impacted revenues, costs, and cash flows.
    • The company's high leverage is a significant solvency risk, increasing its vulnerability to economic downturns and interest rate hikes.
    • BA's reliance on debt financing could increase its financial risk and limit its ability to invest in future growth opportunities.
    • The acquisition of Spirit AeroSystems carries integration risks and uncertainties, which could impact the company's financial performance and operational efficiency.
    • Regulatory scrutiny, legal proceedings, and government investigations related to the 737 MAX accidents continue to pose legal and reputational risks for BA.
    • Pension and postretirement benefit obligations remain a significant financial consideration for the company.
    • BA's competitive landscape is intense, with aggressive international competitors like Airbus seeking to increase market share.
    • Global trade tensions, tariffs, and sanctions pose risks and challenges for BA's international operations and supply chain.

  6. Valuation Analysis:

    • BA's valuation metrics, such as P/E and EV/EBITDA, are currently depressed due to the company's recent financial performance and the challenges it faces.
    • Compared to its peers, BA is trading at a significant discount, reflecting investor concerns about its financial health and future prospects.
    • Potential catalysts for BA's valuation include a successful resolution of the 737 MAX issues, improved operational efficiency, and a return to profitability.

  7. Price Performance:

    • BA's stock price has significantly underperformed the Technology Select Sector SPDR Fund (XLK) and its peers, GD and AIR, over the past three years.
    • BA's price has exhibited higher volatility and larger drawdowns than its benchmark and peers, indicating a higher risk profile.
    • The recent trends in volatility and drawdowns suggest that both BA and XLK are becoming less susceptible to significant price declines. However, BA's higher volatility and larger drawdowns remain a concern.

  8. Future Outlook:

    • Management's guidance suggests that BA's financial performance is expected to remain under pressure in the near term due to the challenges related to the 737 program and the acquisition of Spirit AeroSystems.
    • The company's ability to repay debt and invest in future growth opportunities could be constrained by its decreasing free cash flow.
    • Analyst estimates for BA's future performance are mixed, with some analysts expecting a gradual recovery and others expressing concerns about the company's ability to overcome its challenges.

  9. Summary:

    • BA is facing significant operational and financial challenges stemming from quality control issues with the 737 program, which have led to production slowdowns, delivery delays, and customer considerations that are adversely impacting revenues, costs, and cash flows.
    • The company's liquidity position is weakening, as evidenced by the decreasing cash and short-term investments and the increasing accounts receivable.
    • BA's long-term solvency is under pressure due to the increasing debt levels and the decreasing equity.
    • The company's profitability is declining, with all profitability ratios showing a loss in the most recent quarter.
    • BA's high leverage is a significant solvency risk.
    • The company's cash flow is decreasing, driven by challenges in managing working capital and the impact of the 737 MAX grounding.
    • The company is investing heavily in new aircraft programs and facilities, but the returns on these investments are uncertain.
    • BA's valuation is currently depressed due to its recent financial performance and the challenges it faces.
    • The company's stock price has significantly underperformed its benchmark and peers, reflecting investor concerns about its financial health and future prospects.
    • Management's guidance suggests that BA's financial performance is expected to remain under pressure in the near term, but the company remains confident in the long-term fundamentals of the commercial and defense markets it serves.
    • Overall, BA's investment profile is characterized by high risk and uncertain growth potential. Investors should carefully consider these factors before making any investment decisions.
Peer fundamentals 
Fundamentals
Insights
  • Boeing is facing significant operational and financial challenges stemming from quality control issues with the 737 program, which have led to production slowdowns, delivery delays, and customer considerations that are adversely impacting revenues, costs, and cash flows.
  • The company's liquidity position is weakening, as evidenced by the decreasing cash and short-term investments and the increasing accounts receivable.
  • The company's long-term solvency is under pressure due to the increasing debt levels and the decreasing equity.
  • The company's profitability is declining, with all profitability ratios showing a loss in the most recent quarter.
  • The company's high leverage is a significant solvency risk.
  • The company's cash flow is decreasing, driven by challenges in managing working capital and the impact of the 737 MAX grounding.
  • The company is investing heavily in new aircraft programs and facilities, but the returns on these investments are uncertain.
  • The company is confident in the long-term fundamentals of the commercial and defense markets it serves.
Analysis
  • Revenue - Revenue is decreasing, reflecting lower commercial delivery volume. - The 737 MAX grounding and production slowdowns are significantly impacting the company's revenue. - The company is facing supply chain constraints and working capital pressures, which are impacting its operations and financial performance. - The company's revenue is significantly higher than the industry average.
    • Profitability
      • The company is reporting a net loss in the most recent quarter, indicating a significant decline in profitability.
      • The company is struggling to control operating expenses, which is further eroding profitability.
      • The company's profitability is significantly lower than the industry average.
    • Liquidity
      • The company's liquidity position is weakening, with the Quick Ratio indicating a potential short-term liquidity issue.
      • The company's liquidity position is significantly lower than the industry average.
    • Solvency
      • The company's high leverage is a significant solvency risk.
      • The company's leverage is significantly higher than the industry average.
    • Operational Efficiency
      • The increasing inventories and the decreasing Return on Average Assets suggest potential inefficiencies in asset utilization.
    • Cash Flow Analysis
      • The company's cash flow is decreasing, driven by challenges in managing working capital and the impact of the 737 MAX grounding.
      • The company is investing heavily in new aircraft programs and facilities, but the returns on these investments are uncertain.
      • The company's cash flow is significantly lower than the industry average.
    • Risk Factors
      • The 737 MAX grounding and production slowdowns are significant risks to the company's financial performance.
      • The company's high leverage is a significant solvency risk.
      • The company's reliance on debt financing could increase its financial risk.
      • The acquisition of Spirit AeroSystems carries integration risks.
    • Future Outlook
      • The company's financial performance is expected to remain under pressure in the near term due to the challenges related to the 737 program and the acquisition of Spirit AeroSystems.
      • The company's ability to repay debt and invest in future growth opportunities could be constrained by its decreasing free cash flow.
      • The company is confident in the long-term fundamentals of the commercial and defense markets it serves.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-07)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison:
    • The Boeing Co. (BA) has significantly underperformed the Technology Select Sector SPDR Fund (XLK) over all the periods analyzed. This underperformance is particularly pronounced in the longer-term periods, such as the 3-year period, where BA has underperformed XLK by a significant margin of -82.17%.
    • BA's performance has been inconsistent relative to XLK, with periods of both outperformance and underperformance. However, the overall trend suggests that BA has struggled to keep pace with the broader technology sector.
  • Risk and Return Analysis:
    • BA has provided lower annualized returns than XLK over all the periods analyzed. This suggests that BA has not been as profitable as XLK, despite its higher risk profile.
    • BA has exhibited higher annualized volatility than XLK, indicating that BA's price has fluctuated more significantly than XLK's. This higher volatility suggests that BA is a riskier investment than XLK.
    • BA has experienced significantly larger drawdowns than XLK, with a maximum drawdown of 73.4% compared to XLK's maximum drawdown of 56.96%. This indicates that BA is more susceptible to significant price declines than XLK, further highlighting its higher risk profile.
  • Risk-Adjusted Performance:
    • XLK has consistently offered a better risk-adjusted return than BA, as evidenced by its higher Sharpe ratio. This suggests that XLK has been more efficient at generating returns relative to its risk.
    • BA's beta value has generally been above 1, indicating that it is more sensitive to market movements than XLK. This higher beta suggests that BA is a riskier investment than XLK, as its price is more likely to fluctuate significantly in response to market movements.
  • Overall Assessment:
    • The analysis suggests that BA has underperformed XLK in terms of both absolute and risk-adjusted returns. BA's higher volatility and larger drawdowns indicate a higher risk profile, which has not been compensated for by higher returns.
    • The consistent underperformance of BA relative to XLK, coupled with its higher risk profile, raises concerns about its future prospects. Investors should carefully consider these factors before making any investment decisions.
    • The recent trends in volatility and drawdowns suggest that both BA and XLK are becoming less susceptible to significant price declines. However, BA's higher volatility and larger drawdowns remain a concern.
    • Investors should monitor BA's performance closely and consider its risk profile before making any investment decisions.
Peers Price History(as of 2024-10-07)
General Dynamics Corp. (GD)Airbus SE (AIR)
  • Performance Comparison: The Boeing Co. (BA) has consistently underperformed its peers, General Dynamics Corp. (GD) and Airbus SE (AIR), over the past three years. This underperformance is particularly evident in the longer time periods, such as the 3-year period, where BA has underperformed GD by -87.42% and AIR by -42.75%. While BA has shown some periods of outperformance in shorter timeframes, such as the 1-week period, these have been short-lived and outweighed by the overall underperformance.
  • Risk and Return Analysis: BA has provided lower annualized returns than GD and AIR over the past three years. For example, in the 3-year period, BA's annualized return was -11.69%, while GD's was 16.05% and AIR's was 3.73%. This suggests that BA has not been able to generate returns commensurate with the risk it carries. Furthermore, BA's annualized volatility has been consistently higher than its peers, indicating a higher risk profile. For example, in Q2 2022, BA's volatility was 67.94%, while GD's was 30.13% and AIR's was 44.72%. This higher volatility suggests that BA's stock price is more susceptible to fluctuations, leading to greater potential for losses. Additionally, BA has experienced the largest maximum drawdown of 73.63% in Q2 2022, significantly higher than GD's 15.31% and AIR's 38.06%. This indicates that BA is more susceptible to significant price declines.
  • Risk-Adjusted Performance: BA's Sharpe Ratio has been consistently lower than those of GD and AIR, indicating that it has been offering lower risk-adjusted returns. This suggests that investors are not being adequately compensated for the higher risk associated with BA. For example, in Q2 2023, BA's Sharpe ratio was 1.89, while GD's was 0.13 and AIR's was 1.3. This indicates that GD and AIR have been providing better risk-adjusted returns than BA. Furthermore, BA's beta has been significantly higher than those of GD and AIR, indicating a higher risk profile. This suggests that BA's stock price is more sensitive to market movements, making it a riskier investment.
  • Overall Assessment: The analysis suggests that BA has been a relatively poor performer compared to its peers, GD and AIR, over the past three years. While BA has shown some periods of outperformance in shorter timeframes, these have been short-lived and outweighed by the overall underperformance. BA's higher volatility and larger drawdowns indicate a higher risk profile, which has not been adequately compensated for by its lower returns. This is further confirmed by its lower Sharpe ratio, which suggests that investors are not being adequately compensated for the higher risk associated with BA. BA's higher beta also indicates that it is more sensitive to market movements, making it a riskier investment. Overall, the analysis suggests that BA may not be a suitable investment for investors seeking a balance of risk and return.
Peers Fundamentals(as of 2024-06-30)
General Dynamics Corp. (GD)Airbus SE (AIR)

  1. Market Position and Size:

    • The Boeing Co. (BA) is a large-cap company with a market capitalization of 100571.0, significantly larger than General Dynamics Corp. (GD) with a market cap of 80880.9, but slightly smaller than Airbus SE (AIR) with a market cap of 105729.0.
    • BA's market cap is approximately 24% larger than GD and 5% smaller than AIR.
    • BA's market cap suggests a larger scale of operations compared to GD, but its revenue performance relative to its market cap suggests that it might be less efficient in generating revenue compared to GD. However, BA's revenue performance relative to its market cap suggests that it might be more efficient in generating revenue compared to AIR.

  2. Profitability and Efficiency:

    • BA's profitability metrics are significantly lower than its peers and industry averages. Its Gross Profit Margin, EBITDA Margin, and Net Profit Margin are all significantly lower than its peers and industry averages.
    • BA's profitability is significantly lower than its peers and industry averages, despite its larger market cap and revenue. This suggests that BA might be facing challenges in managing its costs and expenses effectively.
    • BA's return on assets, equity, and capital metrics are significantly lower than its peers and industry averages. This suggests that BA might be facing challenges in effectively utilizing its assets and capital to generate profits.

  3. Financial Health and Stability:

    • BA's liquidity metrics are lower than its peers and industry averages, suggesting that it might have less flexibility in meeting short-term obligations.
    • BA's debt position is significantly higher than its peers and industry averages, indicating a higher level of financial risk.
    • BA's liquidity and debt position are concerning compared to its peers and industry averages, suggesting that it might be facing challenges in managing its financial resources effectively.

  4. Valuation and Market Perception:

    • BA's valuation metrics are significantly higher than its peers and industry averages, despite its lower profitability and efficiency metrics. This suggests that the market might be placing a premium on BA's size and potential for future growth, even though its current financial performance is lagging.
    • BA's valuation is significantly higher than its peers and industry averages, indicating that the market might be overvaluing it based on its size and potential for future growth, despite its current financial performance.

  5. Cash Flow and Capital Management:

    • BA's cash flow metrics are significantly lower than its peers, considering their market caps. This suggests that BA might be facing challenges in converting its revenue into cash flow, potentially due to its lower profitability and higher capital expenditures.
    • BA's cash flow generation strength is significantly lower than its peers, indicating that it might be facing challenges in managing its cash flow effectively.

  6. Growth and Future Prospects:

    • BA's growth metrics show a mixed performance compared to its peers. While BA has shown consistently higher growth in sales revenue and book value per share over the 5-year period, it has shown consistently lower growth in EBITDA, net income, basic earnings per share, free cash flow, free cash flow margin, total assets, and EBIT margin.
    • BA's year-over-year growth rates have shown significant fluctuations, particularly in EBITDA, net income, basic earnings per share, free cash flow, and free cash flow margin. This suggests that BA's growth has been volatile and inconsistent, potentially due to factors such as market cycles, supply chain disruptions, and regulatory changes.
    • BA's 3-year CAGR figures are generally lower than its 5-year CAGR figures, except for sales revenue and book value per share. This suggests that BA's growth has been decelerating in recent years, potentially due to factors such as increased competition, economic slowdown, and technological advancements.
    • BA's growth trends suggest that it is facing challenges in maintaining consistent growth across different metrics. While it has shown strong growth in sales revenue and book value per share, its growth in profitability, efficiency, and cash flow has been lagging.
    • BA's growth rates have been consistently decreasing over the 5-year period for EBITDA, net income, basic earnings per share, free cash flow, free cash flow margin, total assets, and EBIT margin. This suggests that BA's growth in these areas is not sustainable and might be facing challenges in maintaining its growth momentum.
    • BA's most recent year-over-year growth rates are generally lower than its 5-year CAGRs, except for sales revenue. This suggests that BA's growth is decelerating in most areas, indicating that it might be facing challenges in maintaining its growth momentum.
    • BA's growth is not balanced across different metrics. While it has shown strong growth in sales revenue and book value per share, its growth in profitability, efficiency, and cash flow has been lagging. This suggests that BA might be facing challenges in converting its revenue growth into profitable growth.
    • BA's growth profile shows a potential red flag, as its revenue growth is not accompanied by corresponding profit growth. This suggests that BA might be facing challenges in managing its costs and expenses effectively, which could impact its long-term profitability and sustainability.

  7. Potential for Investment:

    • BA's investment attractiveness is mixed. While it has a large market cap and strong revenue growth, its profitability, efficiency, and cash flow generation are significantly lower than its peers and industry averages. Additionally, its debt position is significantly higher than its peers and industry averages, indicating a higher level of financial risk.
    • BA's valuation is significantly higher than its peers and industry averages, despite its lower profitability and efficiency metrics. This suggests that the market might be placing a premium on BA's size and potential for future growth, even though its current financial performance is lagging.
    • Overall, BA's investment attractiveness is uncertain. While it has a large market cap and strong revenue growth, its lower profitability, efficiency, and cash flow generation, coupled with its high debt levels, raise concerns about its long-term sustainability and profitability. Investors should carefully consider these factors before making any investment decisions.

  8. Key Risks and Considerations:

    • BA's lower profitability, efficiency, and cash flow generation compared to its peers and industry averages pose significant risks to its long-term sustainability and profitability.
    • BA's high debt levels increase its financial risk and could limit its ability to invest in future growth or weather economic downturns.
    • BA's volatile growth rates suggest that its future performance might be unpredictable and subject to market cycles, supply chain disruptions, and regulatory changes.

  9. Overall Assessment:

    • The Boeing Co. (BA) is a large-cap company with a strong market presence and potential for future growth. However, its financial performance is lagging behind its peers and industry standards, despite its large size.
    • BA's lower profitability, efficiency, and cash flow generation, coupled with its high debt levels, raise concerns about its long-term sustainability and profitability.
    • Investors should carefully consider these factors before making any investment decisions.