Boeing might appear to fit the profile of a typical Berkshire Hathaway investment, but current earnings ratios and the thawing of US-China trade relations suggest Warren Buffett might not be able buy Boeing’s share price on the cheap.
The new year began as badly as 2019 ended for Boeing [BA]. In mid-January, the US Federal Aviation Administration (FAA) proposed fining Boeing $5.4m for allegedly installing nonconforming slat tracks on approximately 178 737 Max aircraft.
Reports that Boeing was considering raising more capital via debt to help with the associated expenses, cutting R&D and capital spending and halting acquisitions to save cash undoubtedly contributed to speculation that Warren Buffett’s firm, Berkshire Hathaway, which is famous for buying up cut-price stocks, was lining up a major investment in the company.
Boeing’s share price has fallen by nearly 25% since the second 737 MAX crash in March 2019. However, as rumours circulated on 7 January that Buffett may be looking to take a stake in the aircraft maker, Boeing’s share price rose 1% throughout the day’s trading to $337.28.
Will Buffett bite?
Meyer Shields, an analyst at KBW has been one of the most enthusiastic proponents of such a deal, noting that Berkshire Hathaway already has a slice of United [UAL], Southwest [LUV], American [AAL] and Delta [DAL] airlines. But the man who has often stated that the best businesses to invest in are those with steady and reliable growth prospects may not feel Boeing fits that profile.
Moody’s lead Boeing analyst, Jonathan Root, has said that recent developments suggest a more costly and protracted recovery for Boeing to restore confidence with its various market constituents and an ensuing period of heightened operational and financial risk, even if certification of the Max comes relatively near term.
Moody’s has placed Boeing’s debt under review for a downgrade. The ratings agency has pointed out that the longer the grounding runs, the greater the risk to the company’s already blemished reputation, which could have a more lasting impact on future business.
It has been reported that the company has been losing around $1bn a month as a result of the problems with the 737 Max, although the precise scale of the damage will not become clear until its Q4 earnings report on 29 January. The Zacks Consensus Estimate for revenue is projecting net sales of $20.92bn, down 26.18% from the same period last year.
Amount Boeing is reportedly losing per month
Boeing share price: buy or hold?
444On 13 January Reuters reported that 13 out of 24 analysts rated Boeing’s stock as a hold, while seven saw it a buy or a strong buy. Zacks rates the stock as a hold and notes that Boeing is trading at a forward P/E ratio of 21.88 – well above the industry average of 18.26 – and a PEG ratio (which also takes into account the company's expected earnings growth rate) of 2.68 – compared to the aerospace-defence average of 2.29.
|PE ratio (TTM)||47.83|
|Quarterly Revenue Growth (YoY)||-20.50%|
Boeing share price vitals, Yahoo Finance, 24 January 2020
These valuations may further dilute Berkshire Hathaway’s appetite given its aversion to pricey stocks. Boeing shares ended 23 January at $317.79, dropping 5% year-to-date, so not a huge dip given ongoing negative sentiment. Even Shields acknowledges that Buffett won’t overpay for a stake in Boeing.
Boeing is currently trading at 20x its 2020 earnings estimate, which at first glance does not seem excessive. However, after Berkshire Hathaway’s 2015 acquisition of aircraft equipment maker Precision Castparts for approximately 17x its forward earnings estimate, Buffett described it as a “very high multiple”.
Americans’ feelings about Boeing were largely unchanged since March 2019, according to a Forbes report from 14 January referenced research conducted by Rian Mehta, an assistant professor of aviation at the Florida Institute of Technology in the period since the Ethiopian Flight 302 crash. Half of respondents to a separate survey conducted in mid-January said they either felt more positive about Boeing, or their opinion had not changed.
Other possible upsides for the airline manufacturer include the first phase of the US-China trade deal which should see China purchasing $80bn of manufactured goods from the US.