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Boeing’s Increasing Leverage Could Increase Its Risk

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Increasing leverage

Boeing’s (BA) growth has come at a cost. Although increasing demand is good for the company, it also meant increasing its capacity to meet this demand, which BA accomplished by raising more debt.

Boeing’s leverage rose by ~$1 billion in 4Q15 to $9.1 billion as the company issued new debt. BA’s total debt-to-equity ratio has increased from 1.14x at the start of 2015 to 1.34x at the end of 4Q15.

Peer Airbus has a higher leverage with a total debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio of 1.82x and a net debt-to-EBITDA ratio of -1.73x. Embraer (ERJ) is worse with a total debt-to-EBITDA ratio of 5.91x and a net debt-to-EBITDA ratio of 1.12x.

At the end of 4Q15, Boeing’s defense peers Lockheed Martin (LMT) had a debt-to-EBITDA ratio of 2.19x, United Technologies (UTX) had 1.42x, and General Dynamics (GD) had a debt-to-EBITDA ratio of 0.13x.

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Cash flows provide respite

The good news is that Boeing (BA) is still net debt negative, meaning it has sufficient cash to pay off its debt. At the end of 2015, cash on its balance sheet stood at $12.1 billion. For 2015, Boeing generated strong operating cash flows of about $9.4 billion as compared to $8.9 billion in 2014. Its robust cash generation was driven by higher deliveries, solid core operating performance, and disciplined cash management.

Boeing’s net debt-to-EBITDA ratio has improved from -0.07x at the start of 2015 to -0.23x at the end of 4Q15.

Outlook 2016

For 2016, Boeing (BA) expects its operating cash flow for 2016 to be ~$10 billion. It also plans to increase its capacity to 65 aircraft a month by 2017, which will require additional investments.

BA’s major clientele includes commercial airlines, which is a cyclical industry. Airlines have witnessed increased profitability in the last two years due to huge fuel savings. However, it is just a matter of time until fuel prices rebound.

In these conditions, companies with high leverage are deemed to be more risky than those with low leverage. If industry fundamentals deteriorate, it may result in order cancellations for BA, bringing its balance sheet under stress.

Boeing (BA) forms ~6.5% of the iShares US Aerospace & Defense ETF (ITA).

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