Let Boeing die, this investor says

Investment advisor David Baskin has some strong words about beleaguered plane manufacturer Boeing (Boeing Stock Quote, Chart, News NYSE:BA): let it die.

Shares of Boeing were up 11 per cent on Monday as the market reacted to the ever-churning news cycle surrounding the aerospace company.

Last Friday, in a bid to win public opinion in favour of its call for government support, Boeing announced it would be suspending its dividend, putting its share buyback program on hold and cancelling its CEO salary.

Then on Monday, Boeing announced a two-week shutdown of its Seattle factories, with some of its workers having testing positive for COVID-19 and Washington State having declared a state of emergency.

Boeing has been faltering over the past 12 months since a second crash of its 737 Max plane, an event which ultimately led to the worldwide grounding of the plane and investigations into the company’s practices. The investigation exposed a number of omissions and mistakes on the part of the company related to the 737 Max.

It’s a remarkable series of events for what was until recently the bluest of blue chips: an aircraft manufacturer in a severely limited field essentially comprised of just Boeing and rival Airbus.

But Boeing’s troubles are at root an issue of corporate malpractice, said Baskin, president of Baskin Wealth Management, who spoke to BNN Bloomberg on Monday.

“First of all, if you look at their balance sheet what you will see is that they have negative shareholder equity, and you could ask the question, how could one of the most profitable companies in the world, one of the only two manufacturers of large passenger aircraft have negative equity?” Baskin said.

“The reason is they spent $42 billion buying back its own stock and basically used up its entire retained earnings buying back its stock, depleting its balance sheet and making it extraordinarily vulnerable to an event like this,” he said.

Boeing has asked the US government for $60 billion in aid to help support its aerospace manufacturing supply chain. On Monday, Goldman Sachs said it was upgraded BA to “Buy” from “Neutral,” arguing that the company has the cash reserves to make it through the COVID-19 crisis.

Baskin argued that bailing out Boeing would set a bad precedent regarding corporate governance.

“Add on the travesty of 737 Max, which I view as a massive failure of corporate compliance and corporate culture — they knew that these planes were dangerous, they actively conceal that evidence from the Federal Aviation Administration, and my view would be not a penny to bailout Boeing,” Baskin said.

“Let it go bankrupt, let somebody else run it, wipe out the stakeholders who benefited from these shareholder payments, these buyouts of shares which imperilled the company.

It’s horrible corporate governance, and we run the risk of encouraging that action in others, a moral hazard if we bail out Boeing,” Baskin said.

“I don’t know what US Congress is going to do — it’s still a republican president and it’s still a Republican Senate — and they may well approve what Boeing is asking for,” Baskin said. “If that happens, probably the stock will go up. I hope it doesn’t.”