Al Root

Sometimes going to pieces can be the best path forward for a struggling company.

It worked for General Electric and is the preferred path for another American manufacturing icon, according to one Wall Street veteran.

"It's time for Boeing's management to wake up and start creating value," says Jim Osman. His firm The Edge focuses on special situations -- spinoffs, mergers, underfollowed companies, and difficult-to-understand investments. "The clock is ticking on [management's] job security and shareholders aren't waiting forever."

Boeing shareholders are long-suffering. Through Friday trading, shares were down almost 50% over the past five years while the S&P 500 was up almost 80%. The reasons for the underperformance have been well documented: catastrophic design decisions, a pandemic, management turnover, questionable capital allocation, and poor production quality.

Osman is campaigning for a full breakup. He wants to see Boeing split into its three main divisions: commercial aerospace, defense, and services.

Boeing has declined to comment on his breakup idea. New CEO Kelly Ortberg started in the summer. So far a breakup hasn't been on his agenda. Ortberg has taken some bold action, however, including large layoffs and a huge capital raise to help the company's ailing balance sheet.

That should buy Boeing management some time. "I think Boeing will be really reluctant to ditch its military aircraft business as there is a lot of synergy between it and Boeing Commercial Airplanes," says Vertical Research Partners analyst Rob Stallard.

Synergies include things such as research and development as well as commercial plane variants that have military uses. "All the rest is fair game though...limited benefit for Boeing Commercial Airplanes from all the services activities, and same goes for non-aeronautical defense [such as] space."

Services and space could go, but the service division has the benefit of being profitable right now. Boeing's management, and its board, might not want to part with the cash flow, adds Stallard.

Osman believes there is "100% upside" in Boeing stock if the company goes down the breakup route.

Breakup worked -- and then some -- for GE shareholders. GE Aerospace, GE Vernova, and GE HealthCare Technologies are worth roughly $325 billion today, up from less than $100 billion around the time CEO Larry Culp -- the architect of the breakup -- took over in late 2018.

The ultimate fate of Boeing is still to be decided. While Boeing's turnaround unfolds, Osman likes shares of two other companies that are undergoing, or more likely to undergo, significant change: Western Digital and Honeywell.

Western Digital is separating its flash memory business and hard disk drive business.

"Western Digital's upcoming spinoff represents a strategic pivot that promises to unlock substantial shareholder value," says Osman. "This move will enable sharper focus on core competencies and accelerate innovation, positioning the company to capitalize on emerging tech trends."

Mizuho analyst Vijay Rakesh rates shares Buy and recently wrote both companies could be worth about $95 a share. Western Digital stock closed just below $63 on Friday.

As for Honeywell, activist investor Elliott Investment Management got the ball rolling when it disclosed a stake in the industrial conglomerate and suggested it break into two companies, one dedicated to aerospace and the other to automation. Honeywell management has engaged with Elliott and is considering some options, including spinning off the aerospace business.

"Strategic realignment will allow both Honeywell and the new entity to tailor their operational focus and investment strategies more effectively," adds Osman.

He likes the new corporate focus that comes with breakups. Time will tell if, and how far, Boeing goes down the breakup path.

Write to Al Root at allen.root@dowjones.com

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January 12, 2025 13:23 ET (18:23 GMT)

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