Boeing Will Be Much Less Profitable After the Strike

Boeing's labor strike entered its eighth-straight week on Friday -- but hope is growing that the strike could soon end.

On Friday, Boeing (NYSE: BA) negotiators met with leadership of the International Association of Machinists (IAM) and agreed on a proposal to raise machinist wages by a total of 38% over the next four years. By one measure, in fact, the total average wage of a machinist could rise 44% over the course of the contract, exceeding the union's initial demand for a 40% wage hike (but not reinstating the company's defined benefit plan, as some union members had wanted).

With the addition of a one-time ratification bonus of $12,000, the new offer has the potential to end the strike on Monday, when union members will vote on the contract.

At 52 days in length, that would still make this strike the fourth-longest in Boeing's history.

Can Boeing pay this much?

Earlier this week, Boeing announced it will issue and sell as many as 129.4 million shares of new common stock, including an overallotment option. At an offer price of $143 per share, this could generate $18.5 billion in new cash. The company also aims to issue and sell up to 115 million depositary shares (also including an overallotment option, they represent 5.8 million shares of preferred stock that is convertible into up to 40.6 million common shares). Paying 6% interest until converted, this sale will generate approximately $5.8 billion in cash.

In total, this has the potential to raise roughly $24.3 billion in new cash for Boeing, and basically maxes out Boeing's plan, first announced two weeks ago, to raise up to $25 billion in cash over the next three years.

Boeing's intentions for these funds were clear: Just as when COVID-19 struck and cratered sales of Boeing planes, and the company raised cash from debt and equity sales to tide it over until revenues revived -- so too this time, Boeing would amass cash to keep itself solvent until the strike ended.

Against all odds, though, Boeing's massive cash-raise could end up ending the strike, by giving Boeing the money it will need to meet the union's pay-raise demands.

What that would do to Boeing

The news isn't all good for Boeing -- nor for its investors. Here's what you should expect to happen to Boeing going forward, assuming the IAM votes to approve Boeing's contract offer, and assuming similar 38% wage-hikes begin filtering out to the company's other workers:

According to the latest data from S&P Global Market Intelligence, Boeing currently has 618.2 million shares outstanding. Planned issuances of new common stock would grow that number to 747 (coincidentally!) point 6 million shares (747.6 million), diluting existing shareholders out of about 21% of their ownership stake in the company. And it gets worse.

Assuming Boeing's new preferred shares are also converted into 40.6 million shares of common stock eventually, this will grow the fully diluted share count to 788.2 million, and increase the amount of share dilution to 27.5%.

The financial effect on Boeing

What does this mean in terms of dollars and cents? Well, consider: Looking out far past this present crisis, analysts forecast Boeing will return to relatively stable financial health around about 2027. They predict the company will earn net income of $6 billion that year, and grow that number steadily thereafter. However, a 38% wage hike across the company would reduce that profit by about $1.3 billion, to $4.7 billion.

On a share count of 618.2 million, this would work out to about $7.60 per share in 2027 profit (versus the $8.12 per share that analysts are expecting). This would value Boeing today at about 20 times its earnings three years away.

Divide $4.7 billion in net income by 788.2 million shares, though, and Boeing's per-share profit drops to just $5.96 a share, and its 2027 P/E ratio approaches 26 times -- significantly pricier.

Admittedly, there are caveats to this calculation. Boeing might not convert all its preferred shares to common shares as quickly as I'm assuming. It might prefer to pay 6% dividends on the preferred stock rather than convert, and it might convert at a lower ratio, resulting in less share dilution. Boeing might also use some of its new cash to pay down its massive $57.6 billion debt load, lower its interest payments, and boost its profits.

But big picture, the story remains the same: Thanks to this labor strike and the share dilution Boeing will undergo to survive it, Boeing in the future will be a lot less profitable than many investors expect.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.