Dueling Fools
Boeing Going or Gone
June 2, 1999

The Bear Rebuttal
by Bill Barker ([email protected])

The second chapter of Tom Wolfe's The Right Stuff includes a description of an airline captain informing his passengers that the plane's instruments do not show that the landing wheels are locked in place. It's a beautifully written piece, as the reader can hear the calm "down-home-cain't-hardly-aw-shucks" assurance in the voice of the captain who, in truth, has absolutely no way of knowing whether or not the plane is about to burst into flames upon a crash landing. That calm assurance in the face of adversity, the lack of knowledge about whether the equipment is actually functioning properly -- that's what I hear as I read Paul's argument.

Is this company coming in for a soft landing after, as Paul puts it, a turbulent two years? Paul highlights the "whopping" $113.8 billion backlog in aircraft orders, but consider the fact that Boeing's new orders decreased last quarter by 73%(!) from the year before. In summarizing the commercial construction scene, an April 16 Salomon Smith Barney report had this to say: "Our estimate of orders for the year declining by over 25% may not be pessimistic enough." Margins are expected to "deteriorate significantly" over the course of the year. The lofty height from which margins will be deteriorating significantly, by the way, is 3.9%. Commercial airplane sales, which make up about 63% of Boeing's business, are thus getting softer on the top, middle, and bottom lines.

Paul asserts that the company's defense segment is "also" looking up. While it's true that military backlog was up slightly year over year (11%), the long-term decline in military orders, in a nutshell, is the reason why Boeing had to merge with McDonnell Douglas a couple of years back. The defense industry has been through massive consolidation ever since the end of the Cold War because so few can go it alone with so little business in the pipeline.

I guess if you think that there's going to be a reemergence of the Soviet Union as a global threat then it makes sense to bet that Boeing will have some sort of military contract growth. Absent that, I can't think of a reason to suspect that the military orders are ever going to grow enough to justify long-term optimism here. If you think the strong economy is going to give the Democratic nominee a leg-up in the 2000 election -- well, then I think there's no reason at all to expect military spending to increase by any meaningful amount.

Paul says that Boeing's decision to lop off 7,000 jobs at its F-15 construction facility in light of losing out on the recent order by Greece demonstrates the company's newfound efficiency. I applaud my fellow Fool's attempts to turn a negative into a positive here, but let's just say that I'd be a little bit more bullish about the business if, for instance, Boeing had actually not had to close down a major line because it lost out on a contract.

Regarding improved sales due to restocking for Kosovo, the last I checked Boeing was expected to get maybe $200 million in new contracts as a result of the war. Granted, that report is more than a month old, but for a company that does about $57 billion a year in sales, it's going to take a much, much, much longer war to affect Boeing's bottom line in a meaningful way.

I haven't yet mentioned the "Space & Communication" segment of Boeing's business, but, suffice it to say, Boeing's satellite launches keep blowing up. Though (as I've mentioned before) I'm no rocket scientist, I suspect that this is not a positive.

In short, Boeing is involved in several extremely tough industries, and its bottom line performance has been underwhelming for an extended period of time. If you're looking for a company that has been able to demonstrate The Right Stuff, you're at the wrong gate.

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