Boeing's 2020 to be Marred: MAX Grounding and COVID-19
Wide-moat Boeing reported a difficult first quarter as the firm weathers two concurrent challenges, but we’re maintaining our fair value estimate for the firm.
Wide-moat Boeing (BA) reported a difficult first quarter as the firm weathers two concurrent challenges: the grounding of the 737 MAX and the coronavirus pandemic. We’re maintaining our $281 per share fair value estimate for the firm. As the firm cannot deliver its best-selling product and aircraft markets are reeling from the COVID-19 pandemic, sales declined roughly 26% and free cash flow came in at negative $4.7 billion. Management indicated that they would take on debt to fund operations until cash flow returns. But Boeing must first find sources of debt capital, and then receive an airworthiness directive for the MAX and purge working capital to generate cash flow.
At the moment, we are comfortable with Boeing’s ability to raise capital. The firm has access to a $9.6 billion credit facility and about $17 billion in loans and loan guarantees from the government from the CARES Act. The firm’s debt covenants are balance sheet-based, so we are not worried about solvency for the time being.
The 737 MAX receiving an airworthiness directive is a critical component of our thesis on Boeing. Management confirmed that the COVID-19 pandemic has pushed back the firm’s target for an airworthiness directive for the MAX to some time during the third quarter. While we think it's difficult to say with any certainty when the MAX will be recertified with the pandemic slowing down workflow, we continue to think that a third-quarter recertification seems reasonable assuming no additional slowdowns. We expect that the debt available to the firm will allow it to survive if grounding lasts longer than the updated target.
The firm needs to purge inventory to return to positive cash flow, and the COVID-19 pandemic has financially strained airlines. We assume that the most challenging period for airlines will be the second quarter of this year and that Boeing will be able to place the MAX with airlines as replacements for older aircraft that were retired at the beginning of this crisis.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Burkett Huey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.