Key Takeaways
- Despite a difficult period, the business retains good access to liquidity, has in-demand products and benefits from its position in an oligopolistic market structure
- With nearly $60 billion of outstanding corporate bonds, it is among the largest non-financial issuers in the USD investment grade market, and wants to reduce its leverage
- Given the state of Boeing’s production lines and related cash generation, this is unlikely anytime soon – although it could look much improved in 12-18 months
- With product safety a critical driver of bond spreads, and the potential risk of airplane failure (regardless of fault), investors have a decision to make
Boeing is an iconic name. It enjoys high levels of political support in the government of its single largest customer, the United States.1 It produces the president-carrying Air Force One, makes the ubiquitous commercial airliners, influences space exploration, produces military equipment and maintains significant nuclear capabilities for the US. This relationship is a substantial pillar of support for the credit.
But Boeing has had a tumultuous few years. The company clearly has significant room for fundamental improvement, and hardly a week passes without it being in the news. However, it also has the benefit of substantial liquidity, products which are very much in demand, and a privileged position within an oligopolistic market structure (alongside Airbus). This presents active investors with a material opportunity.
Boeing maintains in excess of $10 billion of cash on its balance sheet, as well as bank lines of $10 billion. In 2024 it has used significant amounts of cash as it slowed its delivery schedules, built up inventory in anticipation of soon being able to operate at significantly higher rates of production, and experienced some reluctance from customers to make cash payments without greater clarity over the delivery schedule. It has also raised $10 billion in the bond market.2 Management has come a long way in its thinking since January, speaking openly about raising capital by issuing shares if that were necessary to retain its investment grade credit rating. Because of the high demand and the lack of an alternative, we think it could receive funding from either the bond or equity markets.
Another worry for Boeing management and stakeholders is the dispute between the firm and the International Association of Machinists and Aerospace Workers.3 At the time of writing we do not know the impact of the strike. Boeing is highly motivated to make it short – a stance that is known to negotiators on both sides, which makes this a difficult situation. As company analysts we call this a “known” risk factor and evaluate it in the context of a company whose financial metrics are not going to be the near-term driver of bond performance, with or without the labor dispute. Ultimately the strike is a question of cost, and Boeing will have to assess that cost versus the cost of delay and of issuing equity.
As Boeing’s management has said it would defend its investment grade rating with equity issuance if necessary, we think the economic incentives are consistent with that pledge. Beyond the short term, there is far greater demand for Boeing’s products over the next couple of years than the company can satisfy. Its total backlog of orders was more than $500 billion as of the end of 2023. The order book for the 737 Max is in excess of 4,700 planes, and the firm produced just under 400 in 2023.4 Not only are Boeing’s planes in very high demand, but its main competitor Airbus has a similar situation vis-à-vis its customers and commercial planes.
So, Boeing has more than enough orders to keep it busy for a long time, and its customers cannot readily leave and get their planes elsewhere. This unusually benign supply/demand situation is beneficial for Boeing’s bonds. With about $60 billion of outstanding corporate bonds5, Boeing is among the largest non-financial issuers in the USD investment grade market.
Investment questions
Something we debate is how to manage the potential risk that another Boeing aeroplane experiences a material problem. Commercial planes are fiendishly complex, and there are thousands of them in the sky at any given moment. Equipment can fail for a multitude of reasons including manufacturing problems, equipment maintenance and operation, and latent defects in materials. A manufacturer or airline could execute very well in all aspects under its control, and yet a plane could still experience a failure. As company analysts we call this an “unknown” risk factor.
In the case of Boeing, product safety is a critical driver of bond spreads. We have to balance our understanding of measures the company has taken to improve its safety outcomes versus the possibility that one of its planes suffers a major accident – regardless of fault. We weigh this issue, and the level of compensation the bonds offer, relative to what else we know about the company and relative to alternative investment opportunities.
Other key drivers of bond spreads include demand for products, competition and market share, and decisions of management to increase debt in order to either invest substantially more in capital expenditures, buy a competitor, or buy back its own company shares. Each of the items on this non-exhaustive list could cause the bonds of a company to significantly underperform the broader market. For Boeing, we believe none of these non-safety items has a meaningful probability of harming bondholders in the next few years. So, although there is a substantial unknown that we must factor into the investment case, there is much greater certainty about other aspects than we would normally have.
So, how to weigh this all up? We have a process based on independent and critical thinking. It encourages and facilitates candid, collaborative discussions among teammates with significant experience in their areas of expertise, as well as substantial time working together. We have procedural mechanisms like meetings and other formal communication methods. But the real value-add in complex investment situations is the ability to have meaningful conversations, which lead to enhanced situational understandings used in portfolio construction and position management.
Boeing has recently announced a new CEO.6 Its factories have been under intense, on-site scrutiny for a long time – from its customers as well as the Federal Aviation Administration. Because Boeing sells items with long shelf lives, and because the market structure means customers have very little flexibility about where they get their planes, we expect it to eventually deliver on its orders. With a commercial backlog of more than $400 billion, that represents a significant amount of future cashflow and debt repayment capacity.
Many investors talk about their long-term investment philosophy and deep understanding of the companies in which they invest; Boeing may be the perfect case study for understanding to what degree this is true.
