Boeing stock heading for crash? Charts show cash crunch as demand nosedives

Boeing bosses appear remarkably relaxed about the impact on the company’s reputation from 737 Max crashes that claimed about 350 lives in 2018 and 2019. Although manufacturing has been suspended, Boeing was still trumpeting only the benefits of the 737 Max passenger jet, apparently its fastest-ever seller, on its corporate landing page for the aircraft by the first days of 2020. Updates on the suspension of this craft were diverted to a bland Boeing statement, which put a positive spin on Boeing efforts. The Boeing Company (BA), listed on the New York Stock Exchange, has lost a quarter of its value since an Ethiopian Airlines Flight went down minutes after taking off from Addis Ababa airport in March. While the unbearable sadness of the mass grieving for the flight’s victims has grabbed the headlines, there is another worrying story about Boeing – and that is the positioning of its financial ratios. According to Return on Assets Managed specialist Ted Black, there is a major problem in Boeing’s books when you look at its cashflow, yet its bosses are focusing their spotlight on other, less useful, metrics. – Jackie Cameron

Boeing … Going … Going …?

By Ted Black*

When a firm hits white water, the cry you often hear from the top is, “let’s get back to basics”. As any successful entrepreneur knows, unlike most corporate managers, a very basic, critical business measure is the cash-to-cash cycle – the time it takes from paying to being paid.

Boeing’s cash cycle has headed the wrong way since the late 1990s. The chart below shows how the sales productivity of its inventory and debtors book (ATO – Asset Turnover) is in a nosedive and creating a steep, rising need for cash.

Also read: Another blow for ill-fated Boeing 737 MAX, which has cost Comair R200m – and counting

By the end of the third quarter of 2019, Boeing had inventory of $73.3bn, customers owed $14.7bn and cash owed to suppliers was $15.1bn.  The result is a cash need that’s 93.1% of its annualised sales revenue.

Boeing

Being no financial analyst, for me this raises a “basic”, perhaps even dumb question:

If you can calculate profit only after counting inventory and the customer’s cash is in the bank, how can Boeing be making money or generating cash?

It can’t be, can it? The only way is through the games accountants and the C Suite play. After fights over the years with unions and engineers and a focus on the wrong measures – return on net assets for instance – and damaging quality through outsourcing to cut manufacturing costs, clearly  it’s financial “engineers” who are in charge, not experienced operating ones who know how to design, build and sell high quality, safe planes.

Also read: 737 pilot claims airlines and Boeing ignored his warnings

By spending around $43bn on buying Boeing shares since 2013 and deferring costs incurred into future sales, they paint a picture of a healthy, cash generating, profitable company. Moreover, they do this with the backing of auditors and regulators.

The next chart shows the perfect correlation between the trends in sales, assets, profit after tax return on sales (PAT ROS%) and rising market cap to year end 2018. The firm is still valued at a similar level at the end of 2019 – 40% higher than the total asset base.

Boeing

You can also see why management likes the Return on Net Assets measure. Equity has averaged only 5% of the total asset base since 2009. It peaked at $15bn in 2013 and is now negative. It’s easier to show huge returns on equity when it barely exists than it is to make an economic return on total assets they manage – a true measure of CEO and management competence.

The capital markets seem to swallow the story the numbers tell them, but for how much longer?  Will the mood change as ever more planes go into inventory, not to customers – some of whom have stopped paying money in advance?

Unless the 735 Max is allowed to fly again soon, the financial engineers’ creativity won’t be enough to get Boeing’s asset productivity nosedive corrected and cash needs down. Painting a rosy picture with delayed costs and expected, future profits will be neither credible for much longer, nor will it help restore a once proud, well deserved reputation for safe, high quality aircraft – the main goal.

Also read: Another safety scare for Boeing as plane wings are “prone to crack”

Still, as a last resort, they can always fall back on the claim that Boeing is “too big to fail” and get a bailout. It’s all part of Wall Street’s and the corporate world’s modern version of the Shell Game – one played on the streets of towns and cities since the Middle Ages. Unlike the old version, it’s now legal, but still unethical.

  • Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at [email protected].
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