If you are a regular reader of Market Musings, you will know that I am often a buyer of stocks that fall dramatically on bad news for a big company. I work on the basis that multi-billion dollar corporations can ride out tough times and, when the brouhaha fades, are still massive companies that make massive profits. Even rational traders and investors are prone to headline bias, and when a company is getting trashed left and right for whatever reason, that long-term outlook often gets forgotten for a while.
Over the years, that strategy has served me well. However, if employing it, one must be aware that that some reputational problems also have long term consequences, making some drops in a stock price anything but buying opportunities. Such is the case with Boeing (BA) on this latest collapse.
For six months now, Boeing, once considered a stable, even boring, manufacturing stock, has been exhibiting the kind of volatility more usually associated with young tech startups than old, established companies. To be fair, that is partly because of changes in the market’s view of the economy. Traders have gone from “everything is fine” to “the sky is falling" and back since August, but Boeing, usually a low beta stock, has moved in exaggerated ways with that changing sentiment.
But we all know that's not why we're talking about Boeing today.
There is another factor that has contributed to this volatility, and it is one that makes this a long-term problem for the company rather than just an example of a hysterical response to an overhyped issue. Above all else, airplane manufacturers have to produce safe aircraft and, on several occasions over the last few years, Boeing’s ability to do that consistently has been called into question. Back in 2019, two 737 Max planes crashed within six months of each other, tragically killing all on board in both cases. 737 Max planes all over the world were grounded as a result, but most were back in the air before too long. The minds of traders and investors then turned to other things, and then Boeing got hit by the pandemic and resulting supply chain issues, but those problems have also come and gone.
The latest problems affecting Boeing, issues with door plugs in a couple of 737 models, have also resulted in groundings. That has given a few people, but most notably the CEOs of a few airlines, a sense of déjà vu. So much so, in fact, that United Airlines (UAL) CEO Scott Kirby talked about “build(ing) a plan that doesn’t have the Max 10 in it” in a post-earnings interview with CNBC.
That is, or should be, scary for Boeing and for the company’s stockholders.
Switching suppliers isn’t that simple in the world of aircraft manufacturing given that there is really only one competitor to turn to, Airbus, and they have pre-sold every plane they plan to make for the next seven years. But when a massive customer like United believes that these problems are endemic and that they have to look to a future without Boeing, that just means that the problems for BA could last for at least a decade or so.
Many are claiming that Boeing brought this on themselves, pointing to the fact that they spun off their parts making business, Spirit AeroSystems (SPR), a while back. That means that they effectively outsourced quality control on vital parts to a company that supplies, among many other things, the door plugs on 737s that have caused this problem. More seriously, others are claiming that even that decision is a product of something else, a company whose senior executives and big investors have put their own interests above the safety of passengers.
In an opinion piece published this morning, Les Leopold suggests a link between safety issues at Boeing and stock buybacks. It is worth pausing here to note that this piece was published on Common Dreams, a site that proudly declares itself as having “progressive values,” so using the problems as a reason to attack share buybacks and corporate executives is not really a surprise, and you can read into that what you will. That caveat aside, the facts underlying the piece cannot be ignored.
The author points out that between 1998 and 2018 Boeing bought back $61 billion of its own stock, representing 81.8% of its profits during that period. He also talks about how that money could have been used to design and develop a whole new range of short- to medium-range aircraft to replace the 737, rather than just revamping it multiple times. The implication is that this could have produced safer planes, but the desire to fund buybacks made rehashing the existing design a better option for Boeing’s executives. Oh, and by the way, those executives are compensated primarily in Boeing stock, making them beneficiaries of these buybacks.
Whether by outsourcing quality control or diverting R&D funds to boost the stock price, Leopold's argument is that Boeing has been responsible for the issues that have beset the 737 models, at least in part. Again, you may question how true that is or how strong this particular argument is, given the source, but it is clearly the belief of United's CEO Scott Kirby. So in terms of the impact of Boeing's buybacks on the company and the stock, veracity is a bit of a moot point -- what matters now is how Boeing is being perceived, particularly by key decision-makers.
Don’t get me wrong. None of this will prevent me from flying. In fact, I just took the opportunity to book a couple of flights at reduced prices that will be on 737s. Those planes will be extra scrutinized right now and wouldn’t take off if the pilots, who have far more knowledge on safety issues than I do and just as big a stake in them, didn’t feel 100% confident. Others will feel differently, though, and between a passenger aversion to 737s and the need, once again, to take the planes out of service, it is only a matter of time before other airline CEOs will feel that they too should consider other options.
BA’s drop, therefore, is fully warranted. This is not a case where a headline-driven decline in a stock represents an opportunity to buy at a discount. The problems have already caused a rethink by at least one airline CEO, and there are probably more to come. That rethink will have negative consequences for Boeing for years, if not decades, so BA is not a stock I would want to be holding right now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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