Could things get worse at Boeing?

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Rula Khalaf, FT editor, picks her favorite stories for this weekly newsletter.

Good morning. Yields on 30-year bonds in China and Japan are almost equal for the first time in history. Evidence that China is becoming Japaneseized, or that Japan is no longer Japaneseized? Email us your thoughts at [email protected] and [email protected].

Are we there yet, Boeing?

Boeing’s share price is less than half its 2019 level. The company has faced scandal after scandal, including, but not limited to, 737 Max crashes, door plugs falling out during flight, and the embarrassing landing of two American astronauts on the International Space Station. It does not deliver enough aircraft to cover its growing fixed cost base. Wall Street expects the stock to lose $14 per share this year.

But Boeing, along with Airbus, make up half of the global commercial aircraft duopoly. That’s why most observers, including Unhedged, assume he’ll eventually return to some form of health. The world needs more than one aircraft manufacturer. Who else will it be? To put the same figure, Boeing has a reserve of more than 5,400 commercial aircraft worth $428 billion. This is approximately five years’ worth of income. Analysts expect Boeing to largely complete the ship by 2027, earning $8 per share (about the level of 2015 and 2016), and then improve.

Regular readers of this newsletter will remember that the last time we wrote about Boeing about ten months ago, the question Wall Street was asking was whether the company would return to normal profitability, around $10 per share, in 2026 . This dream has come true. up: consensus for 2026 is now under $6.

The worry is not that the Boeing will never be repaired. The question is whether the wait will be so long that it’s not worth holding the stock today. Let’s assume the company meets 2027 price expectations of $8.25 per share. Set this number to a multiple of 20 (generously, by historical standards). In a few years, this stock will be worth $165. The price is now $155. Why bother if you don’t see Boeing exceeding expectations?

To do this, CEO Kelly Ortberg and his team will have to face a number of crises. Boeing’s largest union is on strike. At the same time, production costs are high and rising, so cost cuts and layoffs are possible. The supply chain continues to be bogged down by quality and process issues. Its efforts to strengthen its supplier network are closely monitored by the Federal Aviation Administration. There are rumors that she will sell her struggling space business. Moreover, it needs to do all this while investing in the next generation of aircraft that will allow it to compete with Airbus.

Are things really as bleak as they can get, making now the perfect time to buy? Perhaps not. Boeing’s debt burden and debt servicing costs are rising. It needs to raise perhaps $10 billion in equity capital to prevent ratings agencies from downgrading its credit rating to junk, which would further complicate its debt.

Boeing can be fairly valued at $155. But it doesn’t look cheap.

(Reiter And Armstrong)

It’s growth, fool

Last week we wrote that long bond yields were rising and US stock prices were also rising. A few years ago, there was a popular argument that stocks—especially “long-term” tech stocks—should rise when rates fell. This argument obviously doesn’t work in reverse when rates rise. As a result, valuation methods involving interest rates, such as Robert Shiller’s Cape excess return and UBS’s Holt framework, now imply that stocks are very expensive.

Several of our regular correspondents wrote that we were missing one trick. Why bond yields are rising is important to valuing stocks. Here’s James Athey from the Marlborough Group:

Is “why” more important than just direction? That is, why bond yields change determines the nature and extent of the impact on stock prices. If bond yields are rising due to high inflation and the central bank is going to intervene, then that should absolutely be a headwind for stock prices…

But if yields rise because growth expectations are rising (but monetary policy is not expected to fully counteract this), then the negative effect on multiples through discount rates may be offset implicitly by rising expectations of future earnings. . . I would argue that the latter statement is still true today – which is why the curve steepens and only half of the rise in nominal yields comes from rises in real yields.

SLC’s Dec Mullarkey wrote:

Fixed cash flows will have a lower value at higher rates. It all seems airtight. But the static model fails in practice because what matters is why rates go up. If this is because growth prospects are rising and inflation and pricing power are increasing, then equity cash flow prospects should also improve…

In the charts below (which use data from 1997 to today), you can see that the sensitivity (slope of the line) is higher for changes in inflation expectations than for changes in real yields.

At a fundamental level, changes in inflation expectations over the past few decades have been an indicator of improving economic growth.

Some boy named Ethan wrote to ask:

Isn’t this the simplest explanation for why stock valuations have been resilient to rising bond yields just above trend labor productivity? This will push bond yields higher because it implies a stronger growth trend and a higher R* (interest rate neutral), and also supports valuations due to better expected profitability (more output for the same amount of labor costs, all other things being equal).

We don’t write for The Economist, so we had to look up what “other things being equal” means. It turns out that this is a Latin word that means “other things being equal.”

The main idea of ​​our correspondents is certainly correct. But that’s only encouraging if you think the big rise in yields over the last month or so actually reflects higher nominal cash flows going forward; that the economy is heating up and companies still either have pricing power or, as Ethan argues, have the ability to increase profits. He also assumes that the Fed will not have to change course. We would say that all this remains in question.

We would also like to point out that this is not an argument that was made back in the happy days of 2021 and 2022. Back then, lower rates meant higher stocks, period. There was no discussion of whether low rates reflect lower growth rates in the future. Well, that’s not entirely fair: It has often been noted that the good thing about big tech stocks is that they are economically insensitive, so a weakening economy in the coming years won’t matter to their earnings growth. And if that’s true, and it’s also true that the economy is getting hot right now, then will If big tech cash flows increase, then big tech becomes a one-way bet for the US economy and we should all own them and nothing else.

One good read

Wargames