Boeing’s Chicago headquarters.
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Boeing ’s chief financial officer indicated his company might sell stock when shares are higher. It’s a good idea. Boeing could use the cash, but the prospect of a stock offering makes investors wary of potential dilution, and therefore could become an overhang.
Boeing (ticker: BA) CFO Brian West was speaking at a Goldman Sachs Group (GS) investor conference Wednesday. Goldman analyst Noah Pponak asked him if a share sale is in the cards if Boeing stock rises. More cash would help repair Boeing’s balance sheet.
“All options are on the table,” replied West.
Boeing’s balance sheet has been badly damaged by the dual problems of Covid-19 and the 737 MAX. The MAX jet was grounded worldwide from March 2019 through November 2020 after two deadly crashes. And Covid destroyed demand for air travel, hurting demand for Boeing products.
Before the second MAX crash, Boeing reported roughly $7 billion in cash against $15 billion in short- and long-term debt on its books, according to FactSet. Leverage wasn’t much of a though for investors. Boeing generated $13.6 billion in free cash flow in 2018.
Now Boeing has roughly $12 billion in cash and $58 billion in short- and long-term debt. Analysts project Boeing will generate free cash flow of about $900 million in 2022. Free-cash-flow generation is still depressed. It’s expected to hit about $9 billion and $11 billion in 2023 and 2024, respectively.
Boeing also has almost $15 billion in undrawn credit revolvers at its disposal, and West said on the company’s first-quarter conference call that management feels “very comfortable with our liquidity position and the balance sheet.”
The leverage ratios of net debt to free cash flow look much worse than they did. What’s more, Boeing has much more net debt than its chief rival, Airbus (AIR.France). The European aerospace giant has roughly $16 billion in cash against $13 billion in debt.
Airbus’ strong balance sheet will be tough for Boeing to compete against. After all, new planes cost billions of dollars to develop.
A Boeing stock sale is a viable option, but it feels late. Back in August 2021, Barron’s suggested Boeing issue equity to repair its ailing balance sheet, and help fund new-product development. Shares were trading for more than $234 at the time.
At the time, Credit Suisse analyst Robert Spingarn said Boeing investors would likely accept a share sale. Since then, Spingarn has moved to Melius Research. He rates Boeing stock at Buy with a $256 price target.
Our suggestion was for Boeing to sell $10 billion to $15 billion of stock. With the share price lower now, it will take a lot more of them to raise that amount of money.
Investors might be less forgiving of a stock issue now with the stock price down about 42% since mid-August 2021. Airbus shares have dropped about 7% over the same span.
And if Boeing were to issue stock at, say $175 a share, instead of $230, it would knock about $10 off Barron’s suggestion that shares could trade as high as $315. In response to a request for comment, Boeing referred Barron’s back to West’s recent comments at Goldman’s conference.
That isn’t a huge headwind, especially with the stock below $140 in recent trading. Still, large stock sales can become an overhang or a self-fulfilling prophecy. Everyone waits to buy in until they see the stock issue completed.
The large gap between today’s price and the mid-August $234 level, however, might be why investors are taking the news in stride on Wednesday. Boeing shares look unaffected by the news. The stock is up 1.8% in midday trading. The S&P 500 and Dow Jones Industrial Average are 0.4% and 0.7%, respectively.
Write to Al Root at [email protected]
