Dueling Fools
Boeing Going or Gone
June 2, 1999

The Bull Rebuttal
by Paul Larson ([email protected]))

I won't disagree with Bill concerning Boeing's historical results, for they have been truly spotty. However, any given stock's value is a function of future cash flow, not the past profits. (Insert cliche about driving using the rearview mirror.) While Boeing's past couple years have been fairly turbulent, the future looks to be much smoother sailing.

Since this is the rebuttal, let me first counter one of Bill's points. My fellow Fool pointed out that Boeing now has long-term debt of over $6 billion even though earnings have been flat. What Bill fails to mention is that total assets and sales have also spiked upward thanks to the major acquisitions the company has made. Debt may have quadrupled, but sales have nearly tripled from 1995's level.

Plus, there is such a thing as "good" debt since interest payments are a tax deductible expense for the company. Boeing's new CFO has indicated that they wish to increase the company's formerly conservative leverage ratios. In other words, the increased debt is just an intentional shift in capitalization to maximize return on equity and not really an indication of fundamental weakness.

Let's now look to the future and see why I believe the company's direction exceeds its past location. Boeing's only other domestic competitor, McDonnell Douglas, is now part of the company. Moreover, the only real competitor abroad, Airbus, is in the process of losing many of its government subsidies and will soon be forced to fly on its own accord. While Airbus has grabbed marketshare over the past few years, I think Boeing is in an excellent competitive position to grab much of it back once the playing field is more level.

Moreover, the company has now had time to properly digest some of its major acquisitions, namely Rockwell and McDonnell Douglas. When any given merger is first consummated, it takes a while for some of the inefficiencies to get flushed out of the program. Systems and staff are not instantly integrated to make a lean manufacturing machine. But now that the company has had some time to more effectively combine resources, some of the synergies of the mergers are starting to make themselves evident.

Take a look at the most recent results and the direction earnings are headed is unmistakable. Boeing has now had 6 straight quarters where earnings were sequentially higher than the previous quarter. Not only have net margins been steadily increasing thanks to more effective cost control on the administrative end (getting rid of redundant staff perhaps?), but sales have also been steadily increasing. One has to go back all the way to early 1996 to find a quarter where sales were not higher than the same quarter from the previous year. Sales up, margins up, earnings up... looks to me like a recovery!

Forget my initial comments about turning the company around; it looks as if the turn has already been made. The market demand for Boeing's products looks as solid as ever (remember the two-year backlog), and now it is just a matter of the company continuing to ratchet costs down. There is still plenty of fat that can be cut from the manufacturing process, and the company's newly found modus operandi concentrating on return on investment should do wonders for Boeing's profits. Earnings are clear for takeoff, and the stock is also poised to head skyward over the next few years.

Next: The Bear Responds