Boeing (BA – Research Report) has its hands full dealing with the fallout from two recent fatal crashes involving its 737 MAX 8 passenger liner. The disasters were bad enough just by the loss of life; from an investor perspective, Boeing stock has been unable to recover. It lost 11% immediately after the second crash, and is currently down 16% from its March 8 pre-crash price of $420.
The reasons why are simple. The MAX 8 is the most popular model of Boeing’s most popular commercial airliner, and in the aftermath of the crashes, all MAX 8s worldwide have been grounded. The grounding has put a halt to new production, cutting into Boeing’s deliveries – and its accounts receivable. On a positive note, the company has traced the source of the fault to a software flaw in the autopilot system and now has a fix ready for implementation, pending approval from Federal regulators.
That should give a boost to the stock, but Boeing made a hash out of the PR around the disasters. An article in Forbes argues that Boeing has failed at leadership – by failing to show that it cares about customer safety. The company appears to have pushed the MAX 8 into production too fast, without providing proper pilot training manuals for the autopilot. And we all know that launching a product too fast can lead to disaster – just look at Samsung’s Galaxy Fold, and the problems with its review models.
So, in addition to the reputation hit caused by the crash, Boeing is suffering from a PR own goal.
Strong on Fundamentals
The company has resources to meet these problems. Starting with the PR issue, Boeing’s fix for the autopilot software is in process of approval, and the company will be meeting with FAA and international regulatory officials on Friday, May 23. A successful outcome there will go a long way toward restoring faith in the company and its aircraft. In addition, Boeing’s other sources of revenue – support for older models, ongoing construction of wide-body airliners, defense contracts – have all continued unimpeded.
Baird analyst Peter Arment (Track Record & Ratings) points all of this out in his recent note on the stock. Focusing on the MAX 8, he says, “The path for the 737 MAX un-grounding [will] become more clear after the upcoming meeting on May 23 with the FAA and global regulators. The software fix is tracking to be certified within days with FAA regulatory approval taking the lead and other major global regulators set to approve shortly thereafter.”
Arment goes on to remind us of the obvious:’, once the fix is approved, Boeing will be free to resume production – and delivery – of the grounded airliner. He sees this happening in Q3 of this year, along with the resumption of revenues from the 737 MAX program. With that in mind, Arment gives Boeing a buy rating with a price target of $470, suggesting a healthy upside of 33%.
The 737 series, and the MAX 8 especially, are major revenue drivers for the Boeing, but the company has been developing plans for several years now on a new aircraft. Dubbed within Boeing as the ‘New Middle Market Aircraft,’ or NMA, and by the industry as the ‘797,’ the project aims to produce a replacement for aging 757 and 767 models.
The NMA was originally planned for a 2025 launch, but according to Jefferies analyst Sheila Kahyaoglu (Track Record & Ratings), the more pressing needs of the current crisis has pushed that timeline out to 2028. Kahyauglu believes, however, that despite the delay the planned airliner will move forward; in her market research, she found consistent desire from industry executives for a model “as either a replacement for the B757 or B767 or ultimately a down-sized B787.” With the 757 and 767 aircraft in service approaching 20 years of age, she sees a potential market of “200 aircraft over 20 years” for the NMA.
Kahyaoglu maintains her previously assigned price target on Boeing, of $448, indicating a potential for 27% upside in this stock.
A Cautiously Optimistic Analyst Consensus
While Boeing is in the midst of coping with serious headwinds, it is not without resources. The company has deep pockets, a historically reliable product line, and is laying plans for future products based on customer needs. It has a fix in hand for the immediate technical problem; once that is approved, the production bottlenecks will work themselves out. Wall Street’s analysts are taking these factors into account.
Overall, Boeing has a ‘Moderate Buy’ consensus rating. This is based on 12 buys, 8 holds, and 2 sells assigned in the past three months – all since the second MAX 8 crash. The average price target of $428 gives an upside of 21% compared to the $352 current share price.
Author: Michael Marcus