The Boeing Company

Moat: 2.5/5

Understandability: 4/5

Balance Sheet Health: 2/5

The Boeing Company is a global aerospace firm engaged in the design, development, manufacture, sale, and support of commercial jetliners, defense, space and security systems, and related services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Boeing, while a major player, does not possess a wide economic moat.

Business Overview

Boeing operates through three primary segments:

  1. Commercial Airplanes (BCA): This segment focuses on the design, development, manufacture, and sale of commercial jetliners and provides related support services.

Key products include the 737 MAX, 787, 777, and 767 aircraft families, known for their technological advancements and range capabilities.

  1. Defense, Space & Security (BDS): This segment develops, manufactures, and modifies military aircraft, weapons systems, satellites, and related products. This segment is heavily dependent on government contracts.

A wide range of products and services including fighter and transport aircraft, satellites, and missile defense systems are manufactured.

  1. Global Services (BGS): This unit provides after-market support such as aircraft parts, maintenance, and modification services to commercial and government clients.

BGS is highly important for generating high margin and recurring revenues.

The commercial aviation industry is characterized by high barriers to entry due to extensive capital requirements, complex manufacturing processes, and stringent regulations. Boeing, along with Airbus, dominates the global market for large commercial aircraft.

The industry is cyclical, affected by macroeconomic factors, geopolitical stability, and shifts in airline profitability.

The defense and space sector is also dominated by a small number of large players, such as Lockheed Martin and Northrop Grumman, and it’s heavily influenced by government spending and budget appropriations.

There’s an increasing emphasis on fuel efficiency and sustainability in both commercial and military aerospace markets, driving the development of new technologies.

What Makes Boeing Different?

  • Deep Industry Experience: With over 100 years of experience, Boeing is an innovator in both commercial and military aerospace, with its commercial aircraft being known for technological innovation and large range capabilities.
  • Established Commercial and Military Customer Base: Boeing has a long-standing presence and strong relationships with a large and diversified set of airlines, militaries, and government agencies worldwide, making it a critical supplier across the globe.
  • Global Presence: Operations are spread across the globe, which allow it to be present in all the major markets for aerospace.
  • Large Backlog: Boeing’s commercial division has a large backlog of orders which ensures a certain level of future revenue. Boeing, through its vast supply chain and integrated operations, is able to produce a large number of aircraft a year.
  • Ability to produce military aircraft, defense systems and space exploration vehicles: With the addition of its defense and space business, the company has a larger and more stable revenue base.

Financials

Revenues: For the nine months ending September 30, 2024, Boeing reported revenue of $55.776 billion, compared to $50.176 billion in 2023. This increase was driven by growth in both Commercial Airplanes and Defense, Space & Security segments. Commercial revenues were primarily derived from aircraft sales, which depend on deliveries, and revenues in BGS are relatively more stable than manufacturing divisions.

Boeing’s sales rely heavily on its two main segments, with Commercial being the most important driver of revenue.

Profitability and Margins: The company’s GAAP gross margin for the same period was 10.7% vs 11.4% in 2023. Operating margin was -9.6% vs -8.1% in 2023. These are mainly due to lower operating margins in Commercial Airplanes, while Defense, Space & Security and Global Services had somewhat positive performance.

Boeing has had a difficult time translating its revenue to positive net income.

Cash Flows: Net cash used by operating activities was $6.64 billion for the first nine months of 2024, compared to a positive cash flow of $4.234 billion in 2023. This decline is primarily due to working capital volatility, as well as Boeing’s problems with 737 production.

Despite the rise in revenues, cash flow production has been volatile.

Balance Sheet: The company’s current assets of $107.49 billion and current liabilities of $98.69 billion for the nine months ended September 30, 2024, give a decent current ratio. However, long-term debt stood at $56.65 billion, with total liabilities of $134.44 billion and total assets of $142.81 billion.

The company is highly leveraged and heavily relies on cash flows to meet its debt and operational obligations. It also has an underfunded pension plan. Debt to Equity ratio as of December 31, 2023 was 1.44 indicating that Boeing finances its assets with higher proportions of debt than Equity.

Free Cash Flow (FCF): Boeing’s FCF has been highly variable with years of massive FCF to large losses. Boeing expects cash flow to improve in late 2024 and beyond, as they expect to increase deliveries and production of aircraft, but there is high uncertainty related to these forecasts.

Boeing’s free cash flow generation has seen large swings, with high uncertainty surrounding whether FCF will be sustained.

Understandability: 4 / 5

Boeing’s business is relatively easy to understand due to its dominance and reliance on commercial aircraft and its prominent government contracts. However, the complexity of production, the involvement of advanced technology, the large global supply chain, and its complex financials make it a little hard to truly understand the underlying economics of Boeing’s business.

Balance Sheet Health: 2 / 5

Boeing’s balance sheet is not in the best shape due to several factors:

  1. High Debt: The company is saddled with a high amount of debt, which impacts its financial flexibility and future growth prospects.
  2. Unstable Operating Performance: Boeing has been subject to massive swings in its profitability, which can be directly tied to its inability to consistently produce jets in the commercial division. Boeing needs a few years of strong revenue generation and earnings to show some stability.
  3. Poor Cash Flow: Despite a large order backlog, FCF has been negative or extremely volatile in recent times.

These factors show the company to have a weak balance sheet, and a poor margin of safety which can prevent the company from reacting effectively to competitive forces.

Moat Analysis: 2.5 / 5

Boeing’s economic moat is based on several factors:

  1. Barriers to Entry: The aerospace industry has extremely high capital requirements, making it challenging for new companies to enter, therefore preventing new competitors. Also, the production of aircraft, the regulation around aircraft certification is extremely time-consuming, which create an additional hurdle to enter the market.
  2. Switching Costs: Airlines typically have close relationships with their suppliers, because they rely on the supplier for long-term support. Also, switching to new suppliers is a risky business for airlines as they depend on the aircraft for their business, making switching suppliers too costly and risky.
  3. Intangible Assets: Boeing has a well-known brand name and reputation for manufacturing quality aircraft, with the result of decades of technological innovation, creating some level of differentiation and premium pricing power.
  4. Government Contracts: Boeing’s defense and space unit relies on large contracts from several different government agencies and militaries throughout the world. In addition, the company’s government contracts creates substantial revenue backlog which helps it to plan for future revenue.

However, the moat is not especially wide, since it’s limited by the following:

  1. Limited Product Differentiation: In Commercial Aviation, there are only 2 major players, Boeing and Airbus, and they primarily sell the same products to the same customers. This means their products are similar and prices can affect their market dominance significantly.
  2. Technological Obsolescence: In both aerospace segments, new technologies can render products obsolete very quickly, and it requires constant investment in R&D to keep a competitive edge, which can be difficult if revenues lag and FCF remains low.
  3. Government and Military Influence: In the Defense and Space sector, government can unilaterally decide not to buy aircraft or shift to other manufacturers. Changes in budget appropriations may result in cancellations of orders. Governments can regulate the price and operations of aerospace firms, especially the pricing of defense equipment.
  4. Lack of Pricing Power: In the commercial segment, Boeing’s bargaining power is limited by the negotiating power of airline companies, and both Boeing and Airbus compete by providing discounts, rebates and credit financing to airlines.

Based on these factors, the moat is not particularly durable or impenetrable. This results in a moat rating of 2.5 out of 5, implying that it only creates a partial competitive advantage, but its strength may fluctuate over time.

Risks That Could Harm the Moat

  1. Production Issues: Recurring problems in aircraft production, especially on the 737 MAX and 787 programs, have led to significant delays and quality concerns. Problems with FAA certification and delivery further hurt Boeing’s ability to convert its backlog to revenue, eroding the moat by creating doubts over its abilities.
  2. Supply Chain Disruption: Boeing’s complex and global supply chain faces significant risks from geopolitical issues and economic downturns. If the company is unable to secure components at reasonable prices and on time, it will lead to production and supply problems, negatively affecting its moat.
  3. Increased Costs: Boeing is facing rising costs due to inflation and supply chain bottlenecks, and the additional costs of increased compliance and regulations.
  4. Technological Disruption: New competitors in the market, especially in emerging technologies or alternative fuels might potentially weaken Boeing’s current competitive advantages.
  5. Regulatory Changes: Changes to regulation and government spending can change aircraft and parts production. It may also affect the terms and conditions of contracts, affecting the predictability of revenue.
  6. Economic Downturn: Decreased airline travel and defense spending can result in reduced demand for aircraft and other products, negatively affecting Boeing’s revenue and cash flows.

Business Resilience

Boeing has some inherent resilience due to its diversified operations, its backlog, its status as an incumbent in the global market, and its relationship with a diversified customer base. However, the company’s current weaknesses in operations and financials reduce its potential resilience. While Boeing should be able to recover from its current setbacks, its recovery is far from certain as it depends on successful execution of its plans and management’s ability to change the culture.

The future seems highly uncertain, with a potential for either massive improvement or further deterioration, based on its management’s capability and overall market trends.

Conclusion

Boeing is a global aerospace behemoth. However, due to the high amount of external risk factors, the company’s moat is average as it cannot create a strong sustainable competitive advantage. Its high debt and volatile operations create significant risks for investors. While the company’s stock price may fluctuate, the long-term intrinsic value of the company is dependent on future growth and return on invested capital.

Therefore, Boeing gets a moat rating of 2.5, an understandability rating of 4, and a balance sheet health rating of 2.