Apr 6 2020 - Boeing: Too Big, Too Frail

Boeing and Airbus have a duopoly on aviation manufacturing and make up 99% of all large plane manufacturing.

Boeing has been proactive in ensuring it has a significant cash position to weather the current market turmoil.

Fear, market volatility and the unknowns ahead due to the current pandemic have provided inordinate volatility in Boeing options and their premiums.

What an interesting time Boeing (NYSE:BA) has found itself in. As if its issues with the grounding of the 737 MAX fleet wasn’t heartache enough, the current COVID-19 pandemic threatening the aviation industry the world over only serves as a double whammy for Boeing. Is Boeing, however, too big to fail or is it now too fragile to weather the storm and turbulence ahead?

Boeing and Airbus (OTCPK:EADSF) (OTCPK:EADSY) are the leaders in the aviation manufacturing industry and account for 99% of all large plane orders and 90% of the total plane market. Arguably, there is little competition in this space. The share prices of both these companies have been smashed - through no fault of their own - due to the coronavirus, and will drastically impact their balance sheets. Boeing and Airbus' stock prices have dropped over 75% and 60%, respectively, off their recent highs.

Given both Boeing and Airbus are the industry leaders in the aviation manufacturing space, once the storm passes they will certainly see appreciation of their share prices. In fact, I’m quite bullish (pending coronavirus containment) on the aviation and hotel industry as through no fault of their own they’ve copped the brunt of this global pandemic. Once stability comes back in the market, which it will, the travel industry will be back in motion with large revenue flows returning to their realm.

So in simple, going long Boeing and Airbus as a long-term investment given their total market share is a play on money flowing back to the airline industry. This can be done via Boeing and Airbus on the Paris Stock Exchange or via Airbus SE in American markets.

The question on many people's lips, however, is whether Boeing can weather the storm. Boeing has been around longer than I have been alive and longer than anyone reading this article has been alive. I have no doubts that Boeing will be around for many years to come. To begin with, Boeing positioned itself with the grounding of the 737 MAX fleet to be financially viable despite the grounding, production halt and cancellation of numerous orders. For the first time in several years, Boeing has negative earnings, as detailed in the below graph. While in the short term Boeing will have its fair share of struggles, as a long-term investment, the upside potential in my opinion is significant despite market concerns that Boeing may become bankrupt.

One point several people tend to miss is how Boeing positioned itself amidst the corona panic. Boeing advanced its credit lines just in case the credit markets froze up preventing it from funds should it need it. So Boeing actually has been proactive and built up a cash reserve and even if orders were to be cancelled it has funds to cover it. Boeing has government loan guarantees should it also need if the credit markets get tight. This is all part of the US government's billion aviation bailout package. I’ve already mentioned how to trade the aviation industry, taking advantage of the current depressed state of play. While this only provides exposure to Boeing and Airbus, these two companies essentially have a duopoly on global aviation manufacturing.

Boeing can be traded individually as a buy-and-hold approach for the eventual expected appreciation; however, as the aviation industry has been one of the hardest-hit due to the coronavirus, the volatility of the Boeing options in particular has swelled immensely. The graph below details volatility currently in the order of 120%.

For some additional downside protection and to take advantage of the inordinate volatility and high premiums, writing a covered call with a deep out of the money (140 strike) monthly option will yield a return above 10% and that is not inclusive of any capital gain. A three-to-four month call option at the same strike yields above 20% return plus any capital gain.

While I expect Boeing to have violent swings in its prices in the near term, a share price under 0 I see as an opportunity to enter, especially when writing a call against it for some downside protection and additional income.

Naturally, before making any investment decision, perform your own due diligence and/or seek independent financial advice.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BA over the next 72 hours. 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.