Many investors ask why Boeing shares are not trading below $100.
Currently there’s no strong connection between share price and fundamentals.
Boeing share prices were pushed down due to the pandemic and dropped below $100 on liquidity and dilution concerns.
Federal Reserve forced debt markets open allowing Boeing to borrow billions to provide it with a cushion to sit through the pandemic.
Boeing (NYSE:BA) has seen wild swings in the value of its shares, and in that regard, the name isn’t really any different from many other names this year. However, what sets it apart in a somewhat negative way are the Boeing 737 MAX crisis which specifically affects Boeing and associated supply chain members and more globally the pandemic-induced pressures on the travel industry.
Source: The National
One returning question I get from readers is:
Why is this not below $100?
I have to admit, for a long time I haven’t really bothered answering that question because it was often a question asked out of frustration, but at this stage I feel that there’s value in at least attempting to answer that question, but there are multiple answer to that question which I will deal with in this report.
Answer 1: You nor me decide Boeing’s share price
This really is the most trivial answer. The price is the way it’s not because you or me want it to be like that (or not). The price is such because the market has established that price point and that’s something that can’t be changed unless the market agrees with our views. Chances for those views to match are small as the investor mix is made out of speculative buyers, sellers, contrarians, long-, short-and mid-term investors. That mix establishes the pricing of the shares and it’s unlikely that a single individual has all of those views, investment strategies and investment horizons all at the same time.
Answer 2: Share price connection is no requisite
This one likely is hard to swallow for many, but there’s no rule dictating that there should be a strong connection between share price and fundamentals. It would be nice if there is, because it would make the investment more understandable and likely less risky, but there’s no clear connection required and again the investment horizon does play a role. There might not exist any connection between share price and fundamentals today, but investing in the aerospace industry tends to be a long-term thing and so people might invest now for that share price connection to be established in the future. That connection between share price and fundamentals can either drive the price up or down. Time will tell…
Answer 3: Boeing liquidity and dilution concern was smaller than many believed
In the market sell-off earlier this year, Boeing shares melted down. That sell-off was triggered by COVID-19, which has reduced near term but also longer term demand for aircraft. The big question became whether the company had what it took to overcome this crisis. In a report, I explained that Boeing would be able to cope with a MAX crisis continuing this year, but it wouldn’t be able to cope with two crises – namely the MAX crisis and the COVID-19 crisis – simultaneously, and the company would face a multi-billion shortfall in liquidity.
As the impact of the crisis became clear, it also became clear that Boeing needed a lifeline, and the company requested that lifeline from the US government to sustain the aerospace manufacturing industry in the US, which spans almost 1,7000 suppliers. Generally that’s considered a good thing, but while there was no indication for it, it also triggered the thought that Boeing shareholders would be wiped out in the same way as happened with General Motors (GM) in 2008. That, in combination with news that the company had fully drawn $13.8 billion, from its loan sent shares to 52-week lows.
Figure 1: Total assets Federal Reserve (Source: FRED)
Boeing shares didn’t start recovering until CEO David Calhoun said that if there would be too many strings attached, he wouldn’t be taking money from the government, and he wasn’t interested in the government taking an equity stake. That sent shares higher, but the problem was that at the time, the debt markets were closed to Boeing and likely many other companies. I pointed out that while Calhoun said he would be looking for other options, there weren’t many (if any) available that didn’t include a role from the government. Boeing has now sold $25 billion in bonds.
What you could ask yourself is whether the debt market was truly closed to Boeing and whether my criticism on Calhoun was justified when I pointed that Boeing didn’t have options that didn’t include a role for the government. I think it was justified. What we observed is that financial markets started trending upward again on the CARES Act being put together and approved. That opened up the debt market and more importantly the Federal Reserve started increasing its balance sheets buying corporate debt (but not necessarily Boeing’s).
There had been pieces of the stimulus package carved out for companies such as Boeing. Not because Boeing is too big to fail, though it’s the country’s biggest exporter, but because the company is of strategic importance for the national security of the US. Important to realize is that the government backing didn’t come in the form of guarantees. Boeing has been looking for a mix of public and private equity with government backing, but ultimately didn’t require government backing because the Federal Reserve forced the debt market open again bailing out Boeing without spending a single dollar on Boeing directly.
The question why Boeing is not trading below $100 is one that’s hard to answer and often asked out of a certain disbelief that Boeing trades at the levels it’s trading now. Admittedly, it’s hard to find any value in Boeing’s share prices but it’s also a fact that no single individual determines the share price and there are many views and timeframes involved that bring the share price to what it is today and there also is no rule stating that there should be a strong connection between fundamentals and share prices though it would certainly make everyone sleep better at night if that were the case.
What investors should realize is that many Boeing investors have never really been willing to factor the costs of the Boeing 737 MAX crisis in and the only reason why Boeing shares headed as low as they went (below $100) was the sentiment turn due to the pandemic that also triggered the fear of shareholder dilution as the debt markets became inaccessible for many corporations. Once that fear of dilution faded, share prices went up strongly. So in some way the answer to why Boeing shares aren’t trading below $100 could be that liquidity concerns have eased for the time being and so did the fear of shareholder dilution. An unsatisfying answer, but one that explains the downturn in Boeing’s share prices as well as the strong recovery.
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Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha