Boeing’s Strike Is Still On. Its Strained Balance Sheet Makes Matters Worse.
Before tackling the plane maker’s long-term issues, CEO Kelly Ortberg will need to buttress its damaged finances
Boeing’s BA -1.76%decrease; red down pointing triangle new chief executive Kelly Ortberg has many active fronts in his battle to “reset” the company, including addressing labor strikes, re-establishing a culture of accountability, fixing ongoing problems at the defense division and figuring out how to build innovative plane models again.
Now he also has to seriously worry about the company’s deteriorating balance sheet.
On Wednesday, the plane maker said that it had lost $6.2 billion and experienced a free cash flow of negative $2 billion during the third quarter, as a result of a strike that started in September. But the worse news came later in the day, when its largest machinist union rejected a deal to increase wages by 64% over the next four years.
Shares in Boeing, which closed down 1.8% Wednesday, kept falling during Thursday’s premarket trading. They have lost 54% in five years.
Remarkably, Wall Street is starting to turn against the debt too. Earlier this month, S&P Global Ratings placed the plane maker on a watchlist for potentially being downgraded to a “speculative” grade. It would be the largest-ever company to suffer this fate. The yield on its bonds has gone from trading less than one percentage-point above Treasury yields in the summer to almost 1.4 percentage points above now, edging closer to the average spread of the highest-rated “junk” bonds.
Until recently, Boeing seemed insulated from any default risk by the fact that its only true rival is Europe’s Airbus AIR 0.48%increase; green up pointing triangle, which can’t service all of the world’s airlines alone. Its order backlog spans 5,400 airplanes, valued at $428 billion.
But the continuing strike comes at a huge cost of about $1 billion in cash a month, and markets are worried about a $12.5 billion wall of debt maturing in 2025 and 2026.
“We do have a plan to address the balance sheet.” Ortberg said in a call with investors Wednesday. “The priority is to protect our investment grade.”
To be sure, Boeing’s ability to get hold of liquidity is undiminished. Despite the production stoppage, it still had $10.5 billion in cash and short-term investments at the end of September. This means that the ratio of current assets to current liabilities—a key measure of a business’s capacity to honor its near-term obligations—remained healthily above one. And, earlier this month, the plane maker secured a $10 billion line of credit, bringing its access to untapped credit facilities to $20 billion.
Investors don’t have the stomach for much more leverage, however. Debt was $57.7 billion at the end of September. After accounting for the $10 billion cash buffer, net debt amounts to more than three times the earnings before interest, tax, depreciation and amortization, or Ebitda, that Boeing would be expected to generate in five years’ time if it overcame the current problems and fully ramped up production of 737 MAX and 787 Dreamliner jets. That is heavy baggage to carry, and is generally a threshold for large companies beyond which markets start to get worried. By comparison, Airbus’s ratio was negative as of June.
Before Boeing reported results on Wednesday, analysts had penciled in, based on prior input from the company, that free cash flow would be positive next year, and debt would start getting repaid, bringing the ratio back below one by 2028.
Yet, even under that over-optimistic scenario, hefty debt repayments would eat up all of the cash expected to be generated over the next two years, according to Visible Alpha, and roughly 40% of it in the following three. On Wednesday, Boeing said it is instead likely to keep burning cash in 2025, and this was assuming the strike would end that day.
Yes, the plane maker has a whopping $83 billion in inventories, which is a $20 billion increase relative to 2018, and includes 30 parked 787s that would release a lot of extra cash if sold. But this is misleading: Allegedly finished planes have a lot of flaws that are costly to fix—what executives call “the shadow factory.”
So Boeing is left without much room to maneuver. As an analyst at a ratings agency puts it: “Investment-grade firms don’t have negative cash flow.” Were a downgrade to happen, most investment funds would be forced sellers, since they don’t have the mandate to hold speculative-grade debt.
Of course, those with the ability to buy bonds in the aftermath might then benefit, as the Arlington-based manufacturer is still unlikely to default. Even in the worst-case scenario, U.S. officials would likely protect one of their fallen industrial champions from bankruptcy, especially considering its importance to the defense sector.
The really hard pill to swallow is for shareholders. They are very unlikely to see any significant payoff in the foreseeable future, as the company goes from slashing the debt to eventually having to invest in new aircraft programs. Even after a prolonged equity slump and using 2028 earnings, Boeing’s enterprise value is 10 times Ebitda, compared with Airbus’s 11.5. The only upside is at a very long-term horizon.
Boeing is expected to raise $10 billion in new shares, though it could do as much as $25 billion over the next three years. If the end figure ends up being closer to the maximum, stock investors might counterintuitively join their bondholder peers in celebration: Dilution is a far lesser concern than a damaged balance sheet.