Friday, July 26, 2019

Tesla, Boeing and Lemmings


I Got It, Nothing Matters. Tesla, Boeing, Other Stocks: It’s Like the Whole Market Has Gone Nuts

by Wolf Richter • Jul 24, 2019 • 223 Comments • Email to a friend

Story stocks, momentum stocks, hyperventilation stocks, consensual hallucination stocks, financial engineering stocks: anything but reality.

You see, Tesla is different. It just reported another doozie, a loss of $408 million in the second quarter, after its $702 million loss in the first quarter, for a total loss in the first half of $1.1 billion. In its 14-year history, it has never generated an annual profit.

It has real and popular products and surging sales, but it subsidizes each of those sales with investor money. And here’s where it’s different this time: investors don’t care. They dig how the company has been consistently overpromising and underdelivering. They dig the chaos at the top. They dig everything that should scare them off.

Yeah, its shares plunged [TSLA] 11% afterhours today, but that takes those shares only down to where they’d been on May 1. Big deal. Shares are down 32% from the peak. But their peak should have been a small fraction of that. Even today, the company is still valued at over $40 billion.

Tesla lacks a viable business model in the classic sense. Its business model is a new business model of just burning investor cash that it raises via debt and equity offerings on a near-annual basis because investors encourage it to do that, and love it for it, and eagerly hand it more money to burn, and they’re rewarding each other by keeping the share price high. It’s just a game, you see. And nothing else matters.

Then there is Boeing [BA]. It just reported the largest quarterly loss in its history of $2.9 billion due to a nearly $5-billion charge related to its newest bestselling all-important 737 Max, two of which crashed, killing 346 people, due to the way the plane is designed. The flight-control software that is supposed to mitigate this design issue is not working properly. And a software fix that is acceptable to regulators remains elusive.

The plane has been grounded globally since March. No one, especially not the regulators, can afford a third crash. So today, Boeing announced that it may further cut production of the plane or suspend it altogether if the delays continue to drag out. This is big enough to start impacting US GDP.

The entire 737 Max episode has been tragic from the first minute, and the cost in human lives has been huge, and it has cost and continues to cost billions of dollars to deal with, among calls that the plane should never fly again.

And what does Boeing’s share price do? It dipped 3% today and is up 2% from a year ago, before all this happened. In essence, two crashes and the grounding of its bestselling plane, and the potential suspension of production of this plane, and its uncertain future … and the stock has ticked up over a 12-month period.

Instead of spending the resources necessary to design a modern plane from ground up, Boeing kept basing its new models on versions of its many-decades-old 737 airframe that wasn’t designed at all for what it is being used for today. This was a decision Boeing made to save some money and pump up its share price.

But here we go: From 2013 through Q1 2019, Boeing has blown a mind-boggling $43 billion on share buybacks (buyback data via YCharts):

Boeing Share Buybacks in $billions

     2013: $2.8B

     2014: $6.0B

     2015: $6.8B

     2016: $7.0B

     2017: $9.2B

     2018: $9.0B

     2019: $2.3B (first quarter only)

Blowing these $43 billion on share buybacks has caused Boeing to have a “total equity” of a negative $5 billion. In other words, it has $5 billion more in liabilities than in assets. This company is out of wriggle room. If it can’t borrow enough money to make payroll, it’s over.

But nothing matters.

If Boeing had invested some of this money that it blew on share buybacks to design a new modern plane from ground up to replace the ancient 737 airframe, these tragedies could have been prevented, and Boeing wouldn’t have this nightmare on its hands. But the corporate cost-cutters and financial engineers, rather than real engineers, had the final word.

Markets don’t care about any of this. They don’t care about real engineers either. They love corporate cost-cutters and financial engineers. They want share buybacks, and if something bad happens, they’ll overlook the $5 billion to pay for the fallout because it’s just a “one-time item.”

And now Boeing still has this plane, instead of a modern plane, and the history of this plane is now tainted, as is its brand, and by extension, that of Boeing. But markets blow that off too. Nothing matters.

Companies are getting away each with their own thing. There are companies that are losing a ton of money and are burning tons of cash, with no indications that they will ever make money. And market valuations are just ludicrous.

A tiny maker of fake-meat hamburgers and hot dogs with just $40 million in sales in the last quarter, its best quarter ever, generating $6.6 million in losses, after 10 years in business, Beyond Meat [BYND] has a stock price that values the company at $12 billion because it will change the way the universe operates, or whatever.

Anything goes: story stocks, momentum stocks, hyperventilation stocks, consensual hallucination stocks, and financial engineering stocks that generate mind-boggling share prices that give these companies incomprehensible market capitalizations, and the mere mention of “fundamentals” gets naysayers ridiculed and thrown out. It’s like the whole market has gone nuts.

In the most important US market of the Tesla Model S and Model X, the plunge in registrations far outpaced their already stunning global decline.

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Blog Comment:

Jos Oskam

Jul 25, 2019 at 1:30 am

This Boeing affair is making my hair stand on end.

I am an engineer. Years ago, I voluntarily quit a very well remunerated job, sold everything, packed up and moved to a dilapidated ruin in France that I’m slowly doing up. Don’t ask about my current income. At least my engineering background is still of some use.

The reason I quit my profession can be summarized as: disgust with managers, specifically the beancounting variety. Over the course of my career the notion of “shareholder value” entrenched itself in the companies I worked for. With the foreseeable consequences. More and more short-term decisionmaking based on this year’s profit figures, stock option valuations and bonuses. Less and less weight to arguments having to do with engineering, customer loyalty, social responsibility, whatever. The suits do what they can and the engineers suffer what they must.

When the 737max was grounded, I thought this would be a wake-up call to a system in which financial engineering had become the only engineering deemed important. Finally, a clear and unequivocal message to the beancounters that there really IS an end to only squeezing dollars from a product with little regard for anything else. Adages like “penny wise, pound foolish” resurrected. After all, it won’t be long before Boeing will have lost more money on the 737max affair than it would have cost them to develop a completely new airframe from scratch. Serves them right, I say.

In such a situation, I would expect to see consequences. Like collapsing stock prices. Fired managers. CEO departing in disgrace, if not outright deposed. Announcements of drastic strategy changes. Serious blowback, you know.

But no. Some bad figures are published, some compensation is promised, some corporatespeak issued. The stock price holds up, people are working on the problem, nothing to see here, move along people.

I am completely flabbergasted. And disgusted. I feel like I have been beamed to another universe where different natural laws apply. I am obviously losing contact with reality. Which might be a good thing, actually.

I’m off, got to do some roof repairs before the next rain.

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Another Blog Comment:

TruckMan

Jul 25, 2019 at 12:37 pm

My first para would be the same as yours, except not France.
I used to lecture both on flight control systems and systems design. There at least 7 major errors Boeing has made with the MCAS, the software being only two of them. I do not see it flying in the US before next year at the very earliest (and maybe never). It will be another year before it flies elsewhere.
Must go also, as I have an entire roof to replace ;)

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Another  Blog Comment:

MC01

Jul 25, 2019 at 2:43 am

I must intervene here. I hope people won’t take it the wrong way: this is just a friendly correction.

Boeing did not opt for the MAX series to have more money to use on share buybacks. It’s far more near-sighted than that.


In 2005 Boeing decided to develop a completely new family of airliners to replace all of their existing models, informally called ‘Yellowstone’.


Yellowstone was to consist of three models: Y1 to replace the 737 and 757, Y2 to replace the 767 and the 777-200 and Y3 to replace the 777-300 and the 747.


This family was to make as much use of common technologies as possible, thus reducing development costs and times.

At the time no new narrowbody (or ‘Little Boy’ in Boeing parlance) engine was available to offer serious improvements over the existing CFM-56 used on the 737, to it was decided to give priority to Y2, which became the 787 Dreamliner.


In February 2011 with new narrowbody engines such as the Pratt & Whitney PW1000G in the final stages of development, it was decided to greenlight the Y1, with the goal of having it in revenue-generating service by 2020. This was a very conservative schedule which could have been well met even assuming troubles during engine development.


However in December 2010 Airbus had launched the A320neo, nothing more than the plain old A320 with new engine options. While it promised conspicuous fuel savings over the old variant, it was no match for the proposed Y1 using advanced technologies aimed at cutting not merely fuel consumption but also airframe maintenance costs.

We’ll never know exactly what happened, but in August 2011 the Boeing leadership decided to “freeze” Y1 development and to launch a modest re-engineering of the existing 737 model (the New Generation or NG) provisionally named 737-RS which became the 737 MAX.


The MAX was introduced in revenue generating service in 2017, saving Boeing a measly 3 years over the Y1, but at a terrible cost.

Even before the two deadly accidents the MAX was seen as an “also run” or a “second choice” and several faithful Boeing customers felt like the US company committed what Henri Ziggler of Breguet and later Airbus fame called “the capital sin of commercial aviation”: designing an aircraft after minimal consulations with the airlines that will have to use it daily for years.

Airlines wanted the Y1, and big Boeing customers like Ryanair and Southwest wanted a saying during the design phase. Instead they got a lot of compromises and an aircraft they didn’t really want.


But the alternative was either that or get in line for the not-exactly groundbreaking A320neo. Or wait at least a decade for China or Japan to design a remotely palatable narrowbody, if any.

Leaving financial conditions aside, Boeing displayed some nigh-on unbelievable leadership flaws which should have made potential shareholders extremely wary and existing shareholders extremely angry. Those flaws were repeated with the 777X, another masterpiece of flip-flopping and near-sightness which is being rightly punished by markets. Should Qatar Airways or Emirates experience the same problems Etihad has experienced and cancel orders it will be really funny to see how the Boeing leadership will flip-flop its way out of another fiasco.

I honestly don’t know what modern day stock market jockeys are drinking/smoking/sniffing. Paint stripper doesn’t destroy brains so throughly.
Boeing is one of those companies, just like Deutsche Bank, which may be too big to fail but are also too big to bail out. It’s not merely just a matter of government snapping its fingers to make everything right because Wall Street is throwing a temper tantrum.


Boeing needs strong, competent leadership with a vague idea of what they are doing, not these two-bit financial alchemists, and only shareholders can get the right leadership on board.

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Another Blog comment:

HR01

Jul 25, 2019 at 6:43 am

MC01,

You’ve pretty much nailed it with respect to Boeing’s decisions. The 737MAX will remain James McNerney’s legacy. This was his call as President, CEO and Chairman of the Board back in 2011. He owns it. Should we be surprised? Not in the least. He was the first without an aviation background or engineering degree to run the company (B.A. from Yale and an MBA from Harvard).

My only disagreement pertains to your final bit:

“…and only shareholders can get the right leadership on board”.

No, shareholders won’t set anything right since institutional investors are complicit in the short-term decision-making which will serve to maximize profits in the here and now, not five or ten years down the road.

Boeing is just one more vivid example of the void in leadership, ethics, integrity, honesty, humility and common sense that our world faces. Doesn’t matter if one looks for these characteristics in the business world, political arena or religious institutions. They’re not to be found (with rare exceptions).

The world will have to encounter its next big crisis and upheaval before a new Age of Consequences arrives and then great character will rise to the top again.

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Another Blog comment:

Kasadour

Jul 25, 2019 at 4:38 am

The 737 Max 8 belonging to Ethiopian Air was going 700mph when it crashed in an almost vertical nose-down pitch. It’s hard to imagine anything in the debris field remotely resembled a commercial airliner. The reason it crashed at such a high speed was because the thrust levers were left at full take-off power. Even if the pilots monitored air speed it wouldn’t have changed the outcome. There’s been a lot of criticism of the pilots for not disabling STAB TRIM, or not knowing they should, but the CDR revealed they did disable it.

As for Tesla- it’s been tapping the debt markets for years and Musk has been making unkept promises just as long. Investors know by now that Tesla cannot deliver on Musk’s promises. The market does not support it and Teslas have ongoing quality control issues. So why do investors keep throwing good money after bad? One possible answer is that they expect the Fed will keep buying Tesla stock through its primary dealers. Deutsche Bank has been buying up Tesla stock for months now.

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Another Blog comment:

Lance Manly

Jul 25, 2019 at 6:47 am

Boeing…. What might be ok software practice for some web site is not acceptable when peoples lives are on the line


“Increasingly, the iconic American planemaker and its subcontractors have relied on temporary workers making as little as $9 an hour to develop and test software, often from countries lacking a deep background in aerospace — notably India.”

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Another Blog :comment (this one by the writer of the entry and owner of the blog):

Wolf Richter

July 25, 2019 at 12:40 pm

Not sure if this the best explanation, but it’s easy enough for non-engineers like me to understand:

“Boeing designed the system after discovering during flight testing that the 737 MAX engine placement—higher and farther out on the wing than on the previous generation—could pitch the plane upward in certain conditions, increasing the likelihood of a stall.”
https://www.wired.com/story/boeing-737-max-8-ethiopia-crash-faa-software-fix-lion-air/

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Another Blog comment:

·         Frank K

Jul 25, 2019 at 3:33 pm
Wolf got is right. In order to save fuel consumption as AIRBUS 320 NEO, they constructed bigger fans. But the bigger fan construction nearly touched the ground , so they moved them as described. This caused some stability issues which they tried to compensate for with the mentioned software MCAS.

I have been informed by a pilot I know.

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Another Blog comment:

RD Blakeslee

Jul 25, 2019 at 3:56 pm

This theory is supported by a video of one of the crashes, showing the aircraft in an extreme pitch-up mode, stalling, and crashing:


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