With shares down by almost 50% over the last five years, Boeing(NYSE: BA) has dramatically lagged the S&P 500, which is up by nearly 80% over that same time frame. Despite a deep competitive moat and a virtual duopoly in the market for large jet airliners, management has been unable to turn these advantages into sustainable shareholder value.
Boeing's quality-control and legal challenges are dragging down its once-impeccable brand reputation and costing billions in fines and fees. Are these near-term challenges a buying opportunity -- or symptoms of a deeper rot that could plague Boeing for years to come? Let's explore what the next five years could have in store for this stock.
A swing and a miss
Blue chip companies like Boeing often struggle to generate stock price appreciation because they operate in mature, slow-growing industries where innovation has largely stalled. In 2017, the company attempted to squeeze more blood out of the turnip with its 737 Max, designed to reduce fuel use by 20% and airframe maintenance costs by 14%.
The plane offered the potential for massive margin enhancements for Boeing's airline customers. And if executed properly, the platform could have created boatloads of shareholder value as well.
Boeing's stock hit an all-time high of $180 in 2019, roughly two years after the first 737 Max delivery. But it was all downhill from there after a series of plane crashes and software malfunctions revealed severe quality control issues and even illegal activity as Boeing staff tried to conceal the plane's problems from regulators.
Boeing avoided criminal prosecution through a $2.5 billion settlement with the Justice Department in 2021. But this year, prosecutors alleged that it violated the terms of this agreement by failing to implement required improvements. After pleading guilty this month, the company will pay a fine of $243.6 million and be forced to invest at least $455 million into its compliance quality and safety programs. Additional lawsuits from crash victims' families could represent an ongoing drain on its finances.
Boeing is still a remarkably stable business
The good news is that Boeing operates in a virtual duopoly with Airbus in the market for large commercial jet airliners. It is also a major U.S. military contractor. So, in the near term, there is very little risk that its customers will suddenly stop buying its products. Even if they wanted to switch, rival Airbus has such a massive backlog that it turns down some orders because it can't make the planes fast enough.
Image source: Getty Images.
Over the long term, new players such as China's Comac could eventually disrupt this static industry. But this threat is very far away. Aviation consultancy group IBA estimates that the upstart could have a market share of just 1% by 2030, leaving the Boeing/Airbus duopoly largely intact.
There is nothing to get excited about
While Boeing's deep moat and duopoly in the high-value airliner manufacturing industry could help it recover from near-term challenges, there isn't much for investors to get excited about. Over the next five years, the company will pay significant fines and legal settlements. Increased spending on quality control could also erode its cash flow.
Most importantly, Boeing will probably aim to consolidate its business and be less likely to invest in daring projects like the 737 Max.
This is a double-edged sword because while a more conservative management strategy reduces the likelihood of mistakes, it also limits potential returns. Investors should bet on companies that can make bold moves and execute them successfully. And that isn't Boeing. Shares look likely to underperform the S&P 500 over the next five years.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
