Boeings’ Wings are about to come off

It is likely that Boeing could lead the Dow Jones Industrial’s composite of 30 stocks to new lows during the second half of 2009.  The skies are becoming increasingly turbulent for Boeing and its wings are about to come off.   

Boeing has long been considered to be one of the best-managed U.S. industrial companies.  It ranks at the top of the list of large successful U.S. manufacturing companies and has been a symbol of ongoing ingenuity and prowess for the USA for many years.  Boeings’ ability to maintain its share price at above $30.00 per share when its fellow blue chip members of the Dow 30 such as GE are having difficulties in maintaining a share price above $5.00 is a testimony to its fortitude and discipline.  The massive backlog of orders for the world’s largest airliner manufacturer and military defense contractor has been a pillar of strength for the United States and its world leading defense and aircraft manufacturing industries. 

Boeing has several problems.  The first according to StockDiagnostics.com, is that the aerospace company has generated three consecutive quarters of negative OPS (Operating cashflow Per Share) or Cash Flow from Operations (CFFO).  StockDiagnostics.com’s OPS ranking for Boeing was recently downgraded to a “7” which is second lowest on a 1-8 scale with “8” being the lowest.  The first downgrade of Boeing to an OPS ranking of “2” from a “1” by StockDiagnostics.com occurred on July 28, 2008 with its shares trading at $60.88.   It was the first OPS ranking downgrade by StockDiagnostics.com for Boeings in its last 15 consecutive quarters.   The second downgrade from a “2” to a “3” occurred on October 27, 2008.  The third consecutive downgrade to a “7” occurred on February 13, 2009, with Boeings shares trading at $40.48.   The recent OPS ranking downgrade to “7” was the worst for Boeing according to StockDiagnostics.com’s OPS ranking records which date back to 1994.  Based on Boeings March 11, 2009, closing share price of $33.27, its shares have declined by 45% since StockDiagnostics.com initiated its first OPS ranking downgrade.   

In checking Boeing’s most recent Cash Flow Statements, I found that the primary cause of Boeings’ cash flow deficiencies is a build up of its inventories. My suspicion is that this has been most likely caused by the cancellation of orders for unsold jet planes that are now parked on its tarmac. 

The second problem that Boeing has is that many of its foreign customers will have difficulties in obtaining financing for Boeings’ booked orders.  This is especially since the banking systems and currencies for many foreign third world countries who generally subsidize their airlines have been collapsing.  My prediction is that Boeings’ backlogs will shrink. 

The U.S. dollar, which has been increasing in value versus most other currencies since October of 2008, is also a looming problem for Boeing.  It makes the airliners, which are manufactured by its main rival Airbus Industries much more price competitive.  Boeing’s sales and order backlogs over the last ten years have benefited from a weak dollar.  Now that the dollar is strengthening against all currencies it will be difficult for Boeing to sustain it revenue growth rates and profit margins.     

Another big problem that has yet to be discounted in its stock price is that Boeing’s potential liabilities have increased sharply.  The cause is a short fall of $11 billion, which caused by declining asset prices in its employees pension plan.  The result is that Boeing’s tangible book value is now negative.  Its tangible book value per shares fell by  $15.42 per share to a negative -$10.46 per share in tangible book value at December 31, 2008.  This compared to a positive tangible book value per share of +$4.96 at December 31, 2007.  

Investors should take heed on StockDiagnostics.com’s three consecutive OPS ranking downgrades for Boeing.  StockDiagnostics.com, which publishes proprietary OPS charts, Free Cash Flow charts and OPS Rankings on its web site for over 8,000 companies also   recently downgraded Harley Davidson (NYSE:HOG), another leading U.S. and global manufacturer of transportation products.  After not having an OPS ranking of greater than  “2” between 1994 and 2008, the shares of the worlds’ leading motorcycle manufacturer fell by over 70% from $38.42 to a most recent price of $10.00 after Harley’s OPS ranking was downgraded to a “6” on August 5, 2008.  After Harley’s OPS Ranking was downgraded again to a “7” on November 4, 2009, its share price fell by an additional 55%.   

The bottom line is that similar to Harley Davidson, Boeings’ OPS ranking recently plummeted to a 15 year low.  Therefore, I believe that Boeing shares will significantly under perform when compared to the overall performance of the Dow 30 composite index for the next 12 months.  The news story that will surprise consumers and investors alike by the end of 2009 will be that the U.S. aircraft industry is having difficulties.