BA has lost about a quarter of its value since fatal accidents caused its newest 737 model civilain aircraft to be pulled off the market. Stories are starting to circulate (that I’m hearing them suggests “starting” may not be the best word) that the Sage of Omaha is beginning to buy Boeing (BA) stock. The rationale? …a value investor‘s belief that the company’s woes are temporary and that all the probable bad news is already discounted in the stock price. Buffett has positions in several airline companies and in at least one supplier to BA, so he arguably would have better insight than most into the BA situation.
How plausible is this? Is the rumor based on fact or simply launched by a third party with an agenda? …if the former, is this a repeat of Buffett’s foray into IBM, another questionable trip down memory lane? what’s BA’s price to book, price to cash flow? I don’t know.
I’ve never owned BA during 25+ years managing other people’s money. I’ve never felt a compulsion to investigate it, either, even though I worked for a long time in value-oriented shops where BA was often a topic of discussion. But I was curious about what interest in BA might not only say about the company but also about the temperature of the market. So I took a quick look.
I went to the Fidelity research area to get some relevant ratios, in this case the P/CF and P/B. I found: $185 billion market cap, P/B of negative $7+ or so a share and P/CF of 30x–not what I would have called a “value” buy. I decided to take another step and look at BA’s September quarter 10-Q on the SEC Edgar site.
the latest 10-Q (9/19)
–BA has total assets of $133 billion. Of that $13 billion is plant and equipment, $12 billion is goodwill and other intangible assets and $75 billion is customer financing. So this is not a plant and equipment story. It’s about intangible assets, craft skill/ proprietary company know how, being a national champion.
–Book value is negative. How so? The most important reason is that over the years BA has spent over $50 billion buying back its own stock, including $1 billion+ during the first nine months of 2019. Accountants deduct that expenditure from net worth. Another $15 billion gets subtracted though”comprehensive loss” related to pension plans. Ex those items, book value would be about $65 billion, meaning the stock is trading at about 3x adjusted book. Again, not an obvious value story.
–Cash flow, which was about $12 billion during the first three quarters of 2018 is slightly negative for the comparable period of 2019.
The idea behind the typical value stock is that the company has assets that have lost value for now because of economic circumstances or lack of skill of current management. Once economic conditions improve and/or management is replaced by more competent executives, their value will shine through again. That’s because the assets haven’t been destroyed, they’ve just been misused.
I don’t think that’s the case here. The assets in question are intangible. The strongest, I think, is that BA is one of only two global large commercial aircraft manufacturers–and the only one in the US. As for the rest, if press reports are correct, BA tried to solve a hardware problem (very heavy engines) with software, a dubious proposition at any time, according to my coder son-in-law. Worse than that, BA may have been less than forthcoming with regulators about potential risks with this solution. As for myself, I’d go to considerable pains to avoid flying on a 737 MAX, given that the penalty for a mistake is so high.
So I don’t get bullishness about BA for two reasons: I think intangibles like craft skill and industrial software can melt away in short order in the way, say, a chemical processing plant can’t. Also, given what I think is the severity of BA’s problems, I don’t think a loss of a quarter of the company’s stock market value is an overreaction. If anything, I think it’s an underreaction.