Boeing stock has had a rough year. Yet some investors see a chance to get some exposure at a value if they “buy the dip.” But one hedge fund manager cautions investors to be wary of the $175 billion Dow Jones stock.
Best case, he argues, the airplane manufacturer crashes worse than others in downturns.
But worse case? Crestcat Capital’s Kevin C. Smith warns something doesn’t look right with Boeing’s numbers. He’s catching a whiff of Enron and Arthur Andersen.
Smith shared a graph of Boeing’s enterprise value (EV) to sales numbers against a graph of its stock price.
Enterprise value is the market capitalization of a company (the value of all its shares) plus its debts and cash.
Essentially, it’s what it would cost to buy a company. That’s because the buyer would acquire all its debts along with its equity.
EV to sales is the relationship between the company’s value and sales. The higher it is, the higher its stock price and/or debts are relative to sales.
At the beginning of 2017, Boeing’s EV to sales went parabolic. That could be because of Boeing’s accounting.
Boeing caught a lot of heat for controversial accounting practices in 2016. An SEC investigation into its “program accounting” practices triggered a wave of media scrutiny.
The Wall Street Journal reported:
Rather than booking the huge costs of building the advanced 787 or other aircraft as it pays the bills, Boeing… defers those costs, spreading them out over the number of planes it expects to sell years into the future… to include anticipated future profits in its current earnings.
If it isn’t obvious why this is risky, and misleading to investors, Reuters explains:
The method can go wrong if a company either initially overestimates the number of airplanes it plans to sell or its costs are significantly higher than planned…
This is strikingly similar to Enron’s “mark-to-market” accounting:
In Enron’s case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though the company had not made one dime from the asset.
The only missing part is what Enron did next:
If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer the asset to an off-the-books corporation where the loss would go unreported.
But the aviation industry learned last fall that Boeing may have hidden issues with the 737 Max for years. Is the company hiding anything else?
And the WTO ruled last year that Boeing has also benefited from massive illegal tax subsidies. Are they breaking any other rules?
Boeing’s highly unorthodox accounting hides risk like Enron did. It obscures the company’s many, many massive cost overruns and sales overestimates. With negative airplane sales so far this year, Boeing’s books look awfully suspicious.
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Last modified: January 22, 2020 11:38 PM UTC