On Monday, Boeing's (NYSE: BA) shares rose sharply on rumors that Warren Buffet's Berkshire Hathaway (NYSE: BRK.A) was buying a stake in the company. Boeing has had a rough few months, largely due to issues surrounding its 737MAX planes which have been consistently hit with mechanical problems. Eventually, it led to the ouster of the company's CEO, Denis Muilenberg with Dave Calhoun.
The company's stock price has also been stagnant since these issues emerged. 2019 was a strong year for most defense and aerospace stocks due to higher than expected defense spending in the U.S., the steep drop in interest rates, and recession fears leading to investors seeking refuge in more defensive sectors.Therefore, Boeing's underperformance is more notable given these secular tailwinds.
Boeing Perfect for Buffet
It's also unsurprising that Buffet would be interested in Boeing given his investment philosophy and Boeing's characteristics. Further, Buffet has accumulated $130 billion in cash. Boeing is one of the few liquid stocks that Buffett can buy that is cheap relative to the broader market.
Of course, it's only cheap due to the controversies related to the 737MAX which doesn't seem close to being resolved anytime soon. Despite this near-term hurdle, Boeing's long-term fortunes are unaffected. It's only real competitor is Airbus which is plagued with its own set of issues. It's also not an industry ripe for disruption due to the massive and complicated supply lines, regulatory issues, expenses, and technical expertise necessary.
Buying into Boeing during its period of struggle also fits in with Buffet's history of buying brand-name, iconic American companies when they are trading at a discount, typically when the company's fortunes are dented due to a combination of bad luck or decisions. Some examples include American Express (NYSE: AXP), Coca-Cola (NYSE: KO), and Goldman Sachs (NYSE: GS).
Interest in Air Sector
In addition to fitting in with Buffet's historical pattern, this move would also be consistent with his recent investments in airlines like Delta Airlines (NYSE: DAL), United Airlines (NYSE: UAL), Southwest Airlines (NYSE: LUV), and American Airlines (NYSE: AAL). He also bought Precision Castparts, a major supplier to Airbus and Boeing at a multiple of 17.5 in early-2017.
Currently, Boeing is trading at a lower multiple, around 16. The multiple is even cheaper given that interest rates are significantly lower now than at the time of the Precision Castparts deal. Basically if Buffet liked that deal, then the Boeing deal is even more attractive.