Boeing Co. Analysis, Research Paper Example

The Boing Company is a pioneer and innovator in the commercial airline industry. The company has in the past few decades elevated itself to the top of the industry by producing top of the range airplanes favored by many airlines. Boeing faces competition from one other company, Airbus, which has a considerable market share. Because of this, Boeing’s stock is highly rated and valued by most financial analysts. But it is important to understand the risks that the company faces and its capital structure before an investor can think of investing in the company’s stock.

Risk and Return

The Boeing Co. has a moderate to high risk profile. This can be seen in the financial information about the company that is available publicly. Some of the risks that Boeing faces come from a number of sources, some which the company cannot control, but can influence.

Costs of Development

The airline industry has become expensive over the years. This is because the development of airplanes has required the use of the latest technology, all of which the company has to develop internally or through the use of external expertise. The need to ensure that commercial jets are safe and can withstand bad weather conditions has led to increasing costs of research and development. A good example is in the company’s latest release, the Boeing 787 Dreamliner. The cost of producing this airplane were so high, the company would have to sell 1,100 units of the airplane just to be able to meet their production costs. Additionally, the company spent a considerable amount on research.

Litigation

The Boeing Co. is in serious competition with Airbus. This is because they are the only major players in the commercial airline production industry. This has led to a number of lawsuits and countersuits between the two companies. Because the two companies compete to get defense contracts, they are usually involved in court battles to gain the advantage. A good example is the 2011 lawsuit that saw the WTO take the side of Airbus, claiming that Boeing should repay the U.S. Government $5.3 billion as a result of the subsidies it receives from the U.S. Government and the Department of Defense.

Market Risks

The Boeing Company mainly faces risks that come from the market. This is the reason why the company spends a lot of money in research and development of new aircraft. The company mainly depends on their relationships with suppliers to produce and supply its aircraft. By mainly outsourcing it assembly and production to outside businesses and companies in emerging markets, the company is prone to price fluctuations that are set and decided by these suppliers and producers. This depending too much on external developers and suppliers means the company cannot control or influence the production efficiencies and the costs of producing the aircraft parts. Emerging markets also contribute considerably to these risks. This is because while emerging markets may be cheaper in production, there is a likelihood that the orders placed by these markets may be cancelled.

Industry Risks

The airline industry is directly related to the oil industry. Irregular fluctuations in oil prices directly and indirectly affect the company’s sales. Therefore, the company has to create aircrafts that are fuel efficient while increasing performance and durability, increasing the cost of research and development.

Equity

The risk associated with Boeing’s equity can be derived from its beta value. Boeing’s equity’s beta is currently at 0.94. This means Boeing’s equity deviates below the market’s Beta (1.0) (Yahoo Finance). The stock therefore swings less than the market this a less risky equity.

The company’s cost of equity is currently at 16.27%. The company’s cost of capital is currently at 15.03%. The company’s required rate of return, represented by the WACC, is lower than the markets required rate of return on its equity. This suggests the company significantly relies on equity.

Capital Structure

Boeing uses two forms of financing its operations; through debt and equity. The company currently prefers to use equity (62%) to finance operations as opposed to debt (38%). The company currently has $14.5 billion in equity and $8.9 billion in debt (Stock Analysis on Net). This is a considerably good financial position. By having more equity than debt, the company maintains considerable controls of operations and can easily pay-off their debt using their current assets.

Debt financing include getting loans from lending institutions. If a company is looking to raise cash through debt, some of the instruments to use in the short term financing are bank overdrafts, bills of exchange commercial papers and factoring. For medium term financing, firms can use bank loans, leases and credit sales or hire purchase. Long term financing after calculations of leverage ratios, firms can issue corporate bonds, purchase debentures or loan facilities that are more than run for more than a year. An example given earlier is that firms that invest in capital projects like factory construction or real estate’s usually use debt financing and may be later issue rights in their share after going public.

The incorporation of debt financing into a company’s capital structure has numerous benefits to a company and its shareholders. By employing debt financing, a company increases its access to the financial resources that is required to take on expansion projects (Pratt and Grabowski). These expansion projects are vital for the company’s competitiveness in the market.

This kind of financing is readily available and requires a shorter span of time to process as compared to equity financing (Denis & McKeon, 2010). Debt financing is easier to access as banks and other financial institutions. This kind of financing will increase dividends paid to shareholders ensuring that the company upholds it corporate culture of ensuring profits for its shareholders (Arouri). This kind of financing is only limited to the amount of collateral that the company can put up. This is usually in the form of the company’s assets. Debt financing appears to have tax benefits over the other sources of finance when acquiring finances under long-term basis. This is due to debt finance having interest having interest, which is tax-deductible.

Considering that Boeing is in the commercial airline industry, the company currently has too little debt. However, as mentioned before, this is largely due to the support the company receives from the United States government and the Department of Defence. Because of the defence contracts, the company receives a considerable amount of subsidies.

Works Cited

Arouri, Mohamed El Hedi. Market structure and the cost of capital. Munich: CESifo, 2013. Print.

Pratt, Shannon P and Roger J Grabowski. Cost of capital : applications and examples. Hoboken: Wiley, 2014. Print.

Stock Analysis on Net. “Boeing Co. (BA).” 20 November 2014. Stock Analysis on Net. Internet Source. 21 November 2014. <http://www.stock-analysis-on.net/NYSE/Company/Boeing-Co/DCF/Present-Value-of-FCFF>.

Yahoo Finance. “The Boeing Company (BA).” 20 November 2014. Yahoo Finance. Internet Source. 21 November 2014. <http://finance.yahoo.com/q/ks?s=BA+Key+Statistics>.