- After losing more than 70% of its value this year, Boeing is now a ‘buy’, according to Goldman Sachs.
- The giant manufacturer’s survival depends on a government bailout.
- The grounding of the 737 Max was the initial devastating blow. The COVID-19 pandemic could knock out Boeing.
Year-to-date, Boeing (NYSE:BA) is down by more than 70%. As coronavirus devastates the travel industry, Boeing is now seeking a government bailout.
That didn’t stop Goldman Sachs from declaring the stock a buy over the weekend:
… Boeing will remain a going concern. We think travel by flight will be as popular as ever once COVID-19 is resolved. We therefore think shares of BA should be procured at the current price…
Why Boeing is Still a ‘Sell’
Boeing’s problems are so severe that only a bailout can save it from corporate death. That’s the common view among industry insiders and investors.
For instance, billionaire investor Bill Ackman last week said the manufacturing giant is on the “brink.”
The bailout plea comes as Boeing takes unprecedented steps to stay afloat. The company’s CEO and board chair are foregoing pay for the rest of the year. Dividend payouts and share buybacks have also been suspended, potentially saving around $4.7 billion annually.
Revenue declines for the foreseeable future are a foregone conclusion. Following the drastic slump in air travel, airlines across the globe are expected to cut back on capital expenditures. This will include deferring new orders for planes.
Already, Boeing’s order book is in bad shape. In February, the company recorded 18 gross orders and 46 cancellations, bringing net orders to negative 28.
Earlier this month, S&P Ratings predicted that Boeing’s cash position will be “much weaker” over the next two years due to the COVID-19 pandemic and the grounding of the 737 Max jets. The agency consequently downgraded Boeing’s debt rating.
Why bailing out Boeing is bad for shareholders
A government bailout may be the only solution for Boeing’s coming liquidity crisis. But it will leave existing investors worse off.
A bailout, which is essentially nationalization, may be a good thing for jobs. But it’s bad news for existing shareholders.
If the 2008 playbook under the Troubled Asset Relief Program (TARP) is applied in this case, a bailout will severely dilute current shareholders.
Under TARP, shareholders of bailed-out U.S. automakers lost billions of dollars when the government took an equity stake in them.
General Motors (NYSE:GM), for instance, received $50 billion. The restructuring ended up costing shareholders over $11 billion.
Corporate welfare on display again
Boeing is requesting approximately $60 billion from the federal government to prop up its supply chain.
All the arguments in favor of a bailout for Boeing are based on the premise that it is too big to fail. The company employs around 130,000 people directly. Boeing’s suppliers, numbering about 17,000, employ a significant number too.
Goldman’s rationale for upgrading Boeing to a ‘buy’ is that the Dow giant will “remain a going concern”. Well, the fact that an American industrial bellwether like Boeing is in dire straits means now is not the right time to buy.
Any investor heeding such advice deserves to be parted with their money.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:40 PM