Boeing: A Closer Look at a Troubled Investment

Boeing (NYSE: BA) appears to be a prime candidate for potential gains in the stock market. The growth of the aircraft market, limited competition, and a wealth of government contracts typically position it favorably. However, after losing 60% of its value over the last five years, the question arises: is it time to buy, or is the decline a sign for investors to steer clear?

A Strong Competitive Edge

The term “economic moat,” made famous by investing icon Warren Buffett, signifies the competitive advantages that protect a company from its rivals. Boeing boasts a significant moat in the large passenger aircraft sector, sharing the duopoly with European competitor Airbus, with a 40% market share against Airbus’s 60%. Besides commercial aviation, Boeing is a key player in U.S. defense contracts, supplying notable systems like the Apache helicopter.

Expect the duopoly to remain intact. The market for large passenger jets presents high barriers to entry, including substantial capital needed, strict regulations, and established relationships between manufacturers and airlines that often hesitate to choose new suppliers.

While a potential long-term competitor like COMAC from China might leverage lower costs and government support to gain a foothold, the International Bureau of Aviation (IBA) estimates it will only claim about 1% of the market by 2030. With significant changes in the industry not expected imminently, Boeing’s risks may largely stem from internal issues.

Can Cost-Cutting Make a Difference?

In the third quarter, Boeing’s revenue dipped approximately 1% year-over-year to $17.8 billion, with its commercial airplane division suffering a 5% decline to $7.44 billion. This setback was amplified by a seven-week strike by the International Association of Machinists and Aerospace Workers (IAM), which concluded recently.

The strike led to a new contract promising workers a 38% salary increase over four years and enhanced retirement benefits, further complicating the company’s financial situation. In the third quarter, Boeing’s commercial airplane division posted an operating loss of $4 billion, making the increased labor expenses a concerning development for shareholders.

Image source: Getty Images.

In the wake of the IAM contract, Boeing announced plans to lay off 2,200 employees and aims to cut its global workforce by 10%, or about 17,000 jobs—an aspect of its cost-reduction strategy initiated during the strike. As a mature entity, aggressive cost management could help to enhance long-term value for shareholders.

Beyond layoffs, Boeing must focus on increasing production volumes to leverage economies of scale. However, this task may prove challenging as the company continues facing quality control challenges highlighted by the FAA.

Considerations Before Investing in Boeing

In an ideal scenario, Boeing could manage to streamline its operations and return to profitability while averting further labor disputes. However, it must also confront a substantial long-term debt burden of $53.2 billion, which drains cash flow and restricts potential returns for investors.

In just the third quarter, Boeing’s interest expenses accounted for around $2 billion, alongside significant research and development outflows, approximately $3 billion in the first three quarters this year. Reducing R&D spending poses a risk of falling behind the competition technologically.

Given these challenges, Boeing seems far from being a “millionaire-maker” stock, and it is likely to underperform against the S&P 500 in the foreseeable future.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.