Boeing: Solid Concept Play Or Capital Goods Mess?
Boeing ticks 100 points north of its 12-month low, but over 100 points south of recent year’s high ground. Plenty of macro issues: Airline profitability slumped, then, resurging oil futures impacted carrier costs unless fully hedged. Production glitches slowed 777 aircraft deliveries while the 737 went through its torturous recertification process.
Why would anyone want to buy into such a conundrum? Although there’s no bottom line to speak of, Boeing’s cash flow is a sizable, supporting metric. When a great company with a dominant position on the board shows no current earnings, bulls call it a “concept” stock. This is Boeing. It competes with Airbus, but actually more with itself.
Tesla, for example, is a concept stock, too. Investors await it’s earning surge, but face a present extreme valuation. Amazon, Alphabet, Meta-Platforms fit such a model of an expected breakout in earnings. Apple an exception, Microsoft, to0. Their earnings power doesn't discount much more than the year ahead.
Market history bears me out. Collected insanity of paying premiums of 300% to 400% above the market's multiplier is best shown in Morgan Guaranty’s 1972 portfolio. They believed they had bought the biggest and best growth stocks, but they failed, miserably. In the ensuing recession of 1973 t- 74, Xerox and Polaroid tapped out. No comeback, even for Eastman,Kodak, Avon Products and Sears, Roebuck.
Fifty, sixty years ago, players fell in love with concept stocks. Vendo, the ready dispenser of snacks and cigarettes was bid into the clouds. Filtered cigarettes, as well. Phillip Morris sold at a premium along with Lorillard and Reynolds Tobacco. Advertising copy ignored health issues in smoking. It took decades for the cancer horror to surface and get government action on labeling. Decades later, tobacco stocks sold at deep discounts to the market, not hundred percent premiums.
Faddish investing can last for decades, but when reality sets in such stocks collapse. Edwin Land, headman at Polaroid, believed his low-priced Swinger camera model would dangle from the shoulders of the entire world. Then came along, 8 mm film, easy to develop, with far superior imaging.
The battle for brand superiority emerged in 1988, with megaweights in food and tobacco. Pillsbury and Kraft were bought out at 50% premiums over the market. PepsiCo bought Quaker Oats for its Gatorade. Reynolds Tobacco ticked at $58 before Kohlberg, Kravis and Roberts bid $108, topping management's offer. Growth stock valuations, peaked in 1991, preceding the death of the Marlboro man at 51 from lung cancer. Nobody picked up the high premium in Tobin’s Q ratio, 50% above the markett’s book value.
Consider Boeing holds as a concept stock, only so long as investors like me can live with its selling above double par with no current earnings. Yes! Plenty of cash flow, but no bottom line. This is unlike retailers Walmart and Costco, sell at a reasonable multiple of per share earnings year after year. Put Home Depot and Lowe’s in this subset as unbroken great franchises.
Does Boeing fit this category, operating in a duopoly with Airbus? All Boeing has to do is fulfill orders in a timely sequence. I’m betting Boeing gets its act together on its order book, holding to expected production expenses. Orders rest in place for several oncoming years.
Early 60s, Boeing's face-to-face competitor was Douglas Aircraft with its DC7 model. But, Douglas priced its aircraft too competitively with Boeing and couldn’t fulfill orders, except to lose money. Shortly thereafter, Douglas went out of business, bankrupted by its self imposed low priced order book.
This was early sixties, and I was a young analyst keenly involved in the aerospace sector. I had built overweighted positions in convertible bonds of Boeing, United, Aircraft, Eastern Airlines, and United Airlines. Money brokers financed me on 10 points down, daily marked to market. I never got a margin call.
Wall Street then was a small village. You'd call anyone on the Street and they’d talk to you if you earned some credentials. Everyone picked up his own phone. Secretaries were found in typing pools. I’d call deal men, operating in unfolding venues like savings and loans and semiconductors. Fairchild Camera and Motorola were the racy specs and fulfilled our dreams.
So I called the general manager of Boeing‘s commercial aircraft, division, in Renton, Washington, asking for a visit. “Sure kid," he said, " we'll give you a bicycle and you can tour the factory floor where they’re assembling 707’s. Ask em anything.”
In the investment world, one idea leads to another. I found assembly crews using titanium fasteners for greater tensile strength and longevity. When I got back lume I researched the unfolding titanium industry, sheet producers and fastener operators. It led to a great play in a new, unfolding space. Bedrock principle involved here is more you know about a company, less likely to trade out of it. Warren Buffett has cornered this investment construct to its extreme. How many investors show fortitude to carry a position for 40 or 50 years? I’m good for 5 to 10, but rarely longer. After all, the average life of a growth stock is rarely longer than five years. Let’s hope Boeing is good for five years based on its order book Quien sabe¿. Boeing’s traded down to par, past June. Four years ago, it traded as high as $450.
No idea what dwelled in investors’ heads then. Three years ago, the stock crashed from $350 to par, now double par, but still an enigma.Let Boeing take another flop, and chartists will sing out that it has traced a classic head and shoulders pattern, a deadly investment picture.
Disbelief in Growth Surfaced in 2013-2014
Table on growth stock valuation shows that even Microsoft sold at a market discount in 2014. So… Is Boeing a great concept stock or just another mediocre capital goods producer? It sits with a backlog of 4,500 aircraft valued at $330 billion. Latest quarterly revenue, just $9.2 billion, up from $4.7 billion a year ago. There’s no security in polite investing. Silent investors in the hands of wealth managers, running trillions, have dropped serious money.
If Boeing’s order book turns out to be another Douglas Aircraft, I’ll go down in flames, too. Then, again, the Boeing 707 took care of railroads. There would be no Disneyland. Honolulu would’ve remained a 1-hotel town (The Royal Hawaiians)