Boeing's Notable Announcement Has Significant Implications for These Three Firms
Boeing's Notable Announcement Has Significant Implications for These Three Firms
In the realm of commercial airplane manufacturing, Boeing (BA 2.56%) towers over the competition, being the heaviest U.S. exporter and a vital component of the nation's economy. Its commercial aerospace and defense operations serve as a crucial employment source and key market for major companies like GE Aerospace (GE 3.03%), RTX (RTX 0.88%), and key suppliers such as Hexcel (HXL 2.35%).
This recent development is a significant boon for those entities and affirmation that Boeing will continue to be a dominant force in the aerospace market. The reason?
Boeing's game-changing announcement
At the tail-end of October, Boeing announced the pricing of a public offering of 112.5 million shares at $143 and $5 billion in depositary shares. This move is expected to bolster their balance sheet by a substantial $21.1 billion. Although this equity raise dilutes existing shareholders, it aligns with Boeing's commitment to maintaining a high-credit debt rating.
Underestimating the significance of this move could be a mistake. It's not simply about navigating a challenging medium-term phase; Boeing needs to secure its position to invest in the future generation of aircraft.
While the mid-2030s may seem an eternity away (former CEO Dave Calhoun asserted there won't be a new aircraft until 2035), the reality is that developing a new aircraft requires years of funding. Consequently, Wall Street analysts have estimated a Boeing cash outflow of $14.1 billion in 2024 and then $2.7 billion in 2025 before becoming profitable again in 2026 with an estimated $5.3 billion.
Consequently, the equity raise is an understandable decision. Boeing's current market position essentially gives it a practical duopoly with Airbus. However, by the time the next generation of aircraft comes into play, China's Comac and possibly Russia's Yakovlev may have narrow-body airplanes capable of stealing orders beyond their domestic markets. Brazil's Embraer can also develop a competitive narrow-body plane.
A win-win for Boeing, a huge win for its suppliers
As stated above, original equipment suppliers like RTX, GE Aerospace (GE 3.03%), and advanced materials supplier Hexcel eagerly await a strong Boeing. OE manufacturers (they supply parts used in new aircraft construction) are heavily reliant on Boeing and Airbus compared to aftermarket suppliers (who produce replacement parts).
All three have faced sales declines this year due to lower-than-expected airplane production. RTX and GE Aerospace also play a role in the commercial aerospace aftermarket. However, nearly all of Hexcel's aerospace sales come from the OE market.
The current lack of new aircraft deliveries has boosted aftermarket demand. Given that older planes remain in service for longer, this has led to a surge in demand for replacement parts from aftermarket suppliers. As previously discussed, GE Aerospace's management now expects the peak period for shop visits for its older CFM56 engine (used on the Airbus A320 family and the Boeing 737) to extend from an original expectation of 2025 by another couple of years.
This dynamic, in part, explains RTX and GE Aerospace's solid performance this year, while Hexcel (which heavily depends on Airbus for about 39% of its sales in 2023 and 15% from Boeing) has struggled.
Hexcel initially projected $1.925 billion to $2.025 billion in sales for the year, but they had to revise expectations down to $1.9 billion to $1.98 billion due to disappointing aircraft production this year.
The Implications of Boeing's announcement for GE Aerospace, RTX, and Hexcel
Investors who excel at mental risk/reward evaluations will appreciate that the risk surrounding these three companies' OE sales has significantly decreased now that Boeing has strengthened its balance sheet.
Not only will the equity raise equip Boeing to ramp up airplane production in the near term, but it will also help reassure the aerospace sector of its ability to tap into the credit markets for future investment in the next generation of narrow-body airplanes. Failing to adequately finance this investment could bring detrimental consequences for the U.S. economy.
While Boeing's equity raise is excellent news for the company and its long-term operational ambitions, it's even more beneficial for its suppliers. A more stable risk profile makes RTX, GE Aerospace, and Hexcel more desirable investments, as Boeing's airplanes are too important to be left behind in the commercial aerospace race.
This equity raise by Boeing will likely lead to an increase in airplane production in the near future, benefitting its suppliers like GE Aerospace and RTX. The strengthened balance sheet of Boeing will also make it easier for the company to invest in the next generation of narrow-body airplanes, ensuring a steady flow of business for its finance and money-dependent suppliers.