Boeing Reports Difficult Fourth Quarter

Wide-moat Boeing BA reported a difficult fourth quarter and full-year 2019, as it continues to deal with the grounding of the 737 MAX. We had already priced in most of these difficulties, so we're slightly lowering our fair value estimate to $335 from $338 to reflect slower near-term growth at the defense unit. Our focus remains on cash flow. Boeing burned about $2.4 billion of free cash flow during the quarter and paid about $1.2 billion in dividends but received a commitment from a syndicate of banks indicating that it could borrow $12 billion, or more if necessary, and separately has about $6.3 billion of liquidity on the balance sheet (although there is $10.5 billion in cash, some is sequestered for the Embraer transaction). We think the debt raise should be enough to cover cash needs for now, and we estimate total available cash would cover operations and the dividend for about a year and a quarter assuming a constant level of negative free cash flow, though the first half of 2020 may be even more free-cash-flow-negative because of lower advance payments on 737 MAX aircraft. Even so, given that the massive backlog for the 737 MAX remains steady and that the company has a solid liquidity profile, we are confident that the dividend is safe.

Boeing’s commercial airplane segment remained the focus this quarter, as the grounding of the MAX continued and the company announced a further production cut for the 787. We’re maintaining our estimate of 180 737 MAXes being produced during the year (which would be just over half of the previous peak production over the same period), as the company said it expects a more gradual reramping of production, and we continue to think a mid-2020 airworthiness directive seems reasonable. We were disappointed that we did not see much additional clarification on the progress toward recertifying the aircraft and expect that the likely next step is a certification flight with the Federal Aviation Administration over the next few months.

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