2008 – A Complete Disaster for Boeing

posted by Nima

February 27, 2009 · Posted in Business 

Boeings 2008 Q4 results confirm the expectation that the financial situation for the company would deteriorate quickly.
As I wrote about 3 months ago:

Boeing’s numbers show us the following:
- From 2005-2007 the company’s free cash flow (operating cash flow – capital expenditures) grew from $5.5 billion to $7.9 billion
- This year, so far, the company has generated a free cash flow of $389 million with the two past quarters yielding negative cash flows; unless the 4th quarter yields incredibly good results the overall free cash flow number for this year will look very bleak
- A look at the most recent balance sheet shows us that the company is among the highly leveraged ones with a 6:1 debt to equity ratio
- What stands out in particular that the company maintains an accounts payable balance of $27 billion versus a shareholders equity of $8.7 billion and a cash balance of $4 billion: the company is obviously making its vendors wait, the article above mentions that a lot of work is being outsourced
- Thus Boeing heavily depends on a lot of vendors that are (1) not being paid in a timely fashion and (2) will most likely not get paid anytime soon if the current economic trend hold up and the company keeps delaying deliveries and losing cash.
I am very bearish on Boeing and expect some seriously bad news for investors shortly. Surely Boeing will also be deemed “too big to fail” by US lawmakers. Obviously, the next step will be yet another bailout request.

The annual report now shows us:

- The free cash flow for 2008 as a whole was $ -2 billion, that is down from regular numbers between $5.5 billion and $ 7.9 billion from 2005 through 2007
- The balance sheet shows us that Boeing shareholder’s equity from Q3 to Q4 08 has dropped from $8.7 billion to $ -1.294 billion. Boeing, like GM and Ford is now officially worth less than $0.00 on its books.
Please also consider Boeing Scrambles for Contracts:

(…) With the government deficit already stretched beyond sanity, how should any more money be left for new fighter jets and planes, especially under an Obama administration?

Boeing is a stock that is poised to collapse.

Since the report came out Boeing has resumed its decline in a straight line and dropped from $42 to now $33.

Please also consider the following grim news for Boeing:

US Senate bill aims to fix Pentagon arms buying:

(…)
The bill builds on past legislative efforts by Levin, McCain and other lawmakers to reform the acquisition process, but it comes at a time when the financial crisis is putting additional pressure on the Pentagon’s budget.

“The financial crisis has proven to be a really interesting forcing function,” said one congressional aide, who asked not to be named. “There just isn’t as much money to go around.”

Fundamental changes were needed to get a grip on systemic problems plaguing Pentagon procurement, said the aide, adding, “Otherwise you’re just rearranging the chairs on the Titanic.”

President Barack Obama and Defense Secretary Robert Gates say they plan to scrutinize major weapons programs, especially those that have run into cost and schedule problems.
(…)

Obama seeks to cut cost of big weapon systems:

(…) Also in Pentagon’s sights could be Lockheed Martin’s F-22 Raptor fighter jet and Boeing Co.’s Super Hornet, which some lawmakers have argued aren’t the right equipment for fighting terrorist groups. Further, missile defense has long been in doubt among Democrats, and cuts there would impact Raytheon Co. (…)

Pentagon Faces Tough Budget Choices:

(…) Mr. Gates’s vision for a leaner budget is bumping up against the military’s own assessment of its weapons needs. Air Force Chief of Staff Gen. Norton Schwartz said Tuesday the service will ask for more Lockheed F-22 Raptor fighters, though Mr. Gates has said the planned 183 jets are sufficient. But Gen. Schwartz also cut back the Air Force’s previous goal of buying 381 of the $143 million jets.

For Boeing Co., a more than $200 billion Army modernization effort, shared with SAIC Inc., is expected to come under pressure, despite success in speeding up deployment of some systems.

Boeing Gets the Boot:

On Tuesday, the news came down: Boeing’s challenge of a Pentagon award to build America’s Next Top Humvee has been definitively rejected. The Government Accountability Office denied the protests from Boeing and partner Textron (NYSE: TXT), which had challenged the Pentagon’s decision to award a trio of $60 million Joint Light Tactical Vehicle (JLTV) prototype contracts to:

  • General Dynamics (NYSE: GD) and partner AM General.
  • Navistar (NYSE: NAV) and BAE Systems.
  • Lockheed Martin (NYSE: LMT) along with BAE Systems (again).

Likewise, a joint protest from Northrop Grumman and partner Oshkosh (NYSE: OSK) got the big poke in the eye from on-high. Along with losing bidder Force Protection (Nasdaq: FRPT), it looks like they’ll be warming the bench for the next few decades as one or more of the Pentagon’s favorites rakes in the tens of billions of revenue dollars that stand to be poured into the JLTV program.

Anyone see any reason why this year and the following should be any better than 2008? I don’t. I still expect Boeing’s stock to come crashing down hard.

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Comments

3 Responses to “2008 – A Complete Disaster for Boeing”

  1. Shauna Kaner on February 27th, 2009 6:08 pm

    Hi,

    What do you think about http://www.crisisofcredit.com/?

    Shauna

  2. Nima on February 27th, 2009 6:37 pm

    I’ll check it out in a bit and will let you know.

  3. Nima on February 28th, 2009 3:10 pm

    I think it’s spot on for the most part. It explains a subset of an overall credit crisis. Just a few comments:

    - Treasuries are not sold by the Federal Reserve, they are bought by them, Treasuries are sold by the US Treasury.

    - A little more emphasis of the Federal Reserve’s responsibility for the whole mess would have been good.

    - This crisis is not just a housing crisis, even though most people think it is. It is a crisis of resource misallocation that covers all sectors of the economy. For example, the commercial property and credit card crises haven’t even hit the market fully yet.

    - Starting in 2001, the Federal Reserve started buying up mortgage backed securities, one of the reasons why investors felt they’d always be able to sell them, and one of the reasons why there was such an obvious housing bubble (http://mises.org/story/2676), this part was missing in the cartoon.

    - It would have been good if the cartoon in the end illustrated the paranoid banker, asking the government for money, and the government going out, taking it from the people by force, and buying a whole bunch of worthless assets from that money, leaving the banker with a handsome payoff, basically the essence of TARP :)

    Overall a nice little piece, though. Thanks for sharing.

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