After the strike, Boeing will be much less profitable

Boeing workers strike Friday marked the start of the eighth week in a row, but hopes are growing that the strike could end soon.

On Friday, Boeing (bachelor 3.54%) Negotiators met with the leadership of the International Association of Machinists (IAM) and agreed on a proposal to increase machinist wages by a total of 38% over the next four years. In fact, by one measure, the overall average driver wage could rise by 44% over the life of the contract, exceeding the union’s initial demand for a 40% wage increase (but no restoration company defined benefit planas some union members wanted).

With the addition of a one-time $12,000 ratification bonus, the new proposal could end the strike on Monday when union members vote on the contract.

The strike lasted 52 days, still making it the fourth longest strike in Boeing history.

Can Boeing pay that amount?

Earlier this week, Boeing announced it would issue and sell 129.4 million new shares of common stock, including the over-allotment option. At an offer price of $143 per share, it could generate $18.5 billion in new cash. The Company also intends to issue and sell up to 115 million depositary shares (including the over-allotment option, representing 5.8 million preferred shares that are convertible into up to 40.6 million common shares). Assuming 6% pre-conversion interest, this sale will generate approximately $5.8 billion in cash.

In total, this could potentially raise approximately $24.3 billion in new cash for Boeing and is essentially entirely in line with Boeing’s plan. first announced two weeks agoto raise up to $25 billion in cash over the next three years.

Boeing’s intentions with these funds were clear: just as when Covid-19 hit Boeing’s plane sales and the company raised cash from debt and stock sales to tide them over until earnings recovered, Boeing will be stockpiling cash this time. . maintain their solvency until the end of the strike.

However, no matter what, Boeing’s massive cash increase could ultimately lead to ending strike, giving Boeing the money it needed to meet union demands for higher wages.

What will this do to Boeing?

This news isn’t exactly good for Boeing or its investors. Here’s what to expect from Boeing in the future, assuming the IAM votes to approve Boeing’s contract proposal, and assuming a similar 38% pay increase begins to apply to other company workers:

According to the latest data from S&P Global Market IntelligenceBoeing currently has 618.2 million shares outstanding. Planned issues of new ordinary shares will increase this number to 747 (coincidentally!) 6 million points (747.6 million), dilution of existing shareholders of approximately 21% of their stake in the company. And it gets worse.

Assuming that Boeing’s new preferred shares ultimately also convert into 40.6 million shares of common stock, this would increase the number of fully diluted shares to 788.2 million and also increase the amount of share dilution to 27.5%.

Financial impact for Boeing

What does this mean in dollars and cents? Well, consider this: Looking well beyond the current crisis, analysts predict that Boeing will return to relatively stable financial condition by around 2027. They forecast that the company will generate net income of $6 billion this year, with that figure set to rise steadily thereafter. However, salary increase by 38% companywide will reduce those profits by about $1.3 billion, to $4.7 billion.

At 618.2 million shares, that would work out to about $7.60 per share in earnings in 2027 (vs. $8.12 per share that analysts expect). Boeing’s value today will be about 20 times its earnings in three years.

Divide $4.7 billion in net income by 788.2 million shares, and Boeing’s earnings per share fall to just $5.96 per share, and P/E ratio for 2027 approaches 26 times – much more expensive.

True, there are caveats to this calculation. Boeing may not be able to convert all of its preferred stock into common stock as quickly as I anticipate. A company may choose to pay a 6% dividend on the preferred stock rather than convert it, and it may convert at a lower ratio, resulting in less dilution. Boeing could also use some of its new cash to pay down its massive $57.6 billion debt load, lower interest payments and boost profits.

But overall, the story remains the same: thanks to this strike and the stock dilution that Boeing will undergo to survive it, Boeing will become a future much less profitable than many investors expect.