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Bull of the Day: Boeing (BA)

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Boeing (BA - Free Report) will be in the news quite a bit this month, and probably next, as it deals with the fallout from another tragic crash involving its new 737 MAX 8 aircraft.
 
I chose to make BA today's Bull of the Day because, on the merits of the Zacks Rank alone, it deserves it, as EPS estimates have gone up 10% in the past six weeks since their last earnings report.
 
But I also chose it because it is a significant space age pioneer now embroiled in tragedies that it will take, deservingly so, a lot of heat and questioning over. So whether you are a BA investor or not, the story of how we got here will interest you as an airline passenger and concerned citizen.
 
Two Tragic Crashes, Lots More Questions
 
On March 10, Ethiopian Airlines Flight 302 was a passenger flight from Addis Ababa Bole International Airport in Ethiopia to Jomo Kenyatta International Airport in Nairobi, Kenya. The Boeing 737 MAX 8 aircraft crashed six minutes after takeoff, killing all 157 passengers and crew aboard.
 
This was the same new aircraft as the crash of Lion Air Flight 610 in Indonesia on October 29, 2018, which killed all 189 passengers when it plunged into the Java Sea 12 minutes after takeoff from Jakarta.
 
Given this second tragedy for this new version of the 737, governments around the globe began grounding the plane this week and banning it from their airspace. The countries included China, Australia, the UK and eventually Germany and France.
 
As of this writing on the afternoon of March 12, US carriers like American Airlines (AAL - Free Report) and Southwest Airlines (LUV - Free Report) were still operating the MAX 8 as scheduled.
 
What Do We Know About the Safety of the MAX 8?
 
While I am not an engineer, I became a private pilot as a teenager and come from a family of commercial pilots so I will attempt to explain, as simply as possible, what we know.
 
First, when Boeing designed this new 737, it added more powerful and fuel-efficient engines and had to adjust their placement on the wings. This in turn, created changes in flight characteristics.
 
One of the changes was a tendency for the aircraft to pitch its nose upward more than required during climbing procedures. In aviation dynamics, the relative orientation to level flight is known as the "angle of attack" (AOA) and is extremely important to monitor because too steep an angle, without enough power (speed), will result in a "stall," or loss of lift (the force of air passing under and over wings that keeps birds, planes, and BASE jumpers traveling to their destinations).
 
In a stall, a plane can fall rapidly, requiring emergency procedures from pilots to regain controlled flight.
 
So Boeing invented a new automated control system to deal with that tendency of the 737 MAX 8, and not merely reduce the constant workload of pilots but also reduce the risk of the plane approaching an AOA that could lead into a stall.
 
That system is called MCAS (Maneuvering Characteristics Augmentation System) and is implemented on the 737 MAX to enhance pitch characteristics at elevated angles of attack. The MCAS function commands stabilizer air surfaces, such as the tail elevator and associated trim tabs, to pitch the aircraft nose down and thereby enhance flight characteristics during steep turns with elevated load factors and at airspeeds approaching stall, which are common on takeoff.
 
MCAS is activated without pilot input and only operates in manual, flaps up flight. The system is designed to allow the flight crew to use manual or switch-based trim controls to override MCAS input. The function is commanded by the Flight Control computer using input data from sensors and other airplane systems.
 
One of the sensors giving input to the system is an Angle of Attack measurement device which can determine, based on air flow across the wings, how steep the aircraft nose is pitched. Obviously, if those sensors don't work properly, they can give incorrect input to the MCAS and activate it.
 
For instance, if an AOA sensor incorrectly signals a X-degree upward pitch at an airspeed that is too low, the MCAS will activate and attempt to push the nose of the aircraft down to avoid a stall.
 
Based on investigation of available data from the October Lion Air Flight 610 crash, including maintenance records and cockpit conversations, a faulty AOA sensor may have been involved that put the plane into a steep dive. Data from the black box indicates that pilots were exerting over 100 lbs of force on the yoke to pull the nose up and physically counteract the MCAS commands.
 
Initial data about the post-takeoff flight and crash of Ethiopian Airlines Flight 302 on Sunday indicate some potential similarities. While that investigation to discover the causes, and prove or disprove a connection, could take months, government officials, airline personnel, flyers, and investors are all having their say in the public square.
 
Fortunately, the cockpit voice and flight data recorders were recovered quickly, unlike the Indonesian crash in the ocean. This should provide many answers quickly.
 
How Much Could This Impact Boeing's Business?
 
Boeing has also responded quickly this week in releasing an important software enhancement and training manual upgrade. Here's how the company described it in their March 11 press release...
 
For the past several months and in the aftermath of Lion Air Flight 610, Boeing has been developing a flight control software enhancement for the 737 MAX, designed to make an already safe aircraft even safer. This includes updates to the Maneuvering Characteristics Augmentation System (MCAS) flight control law, pilot displays, operation manuals and crew training. The enhanced flight control law incorporates angle of attack (AOA) inputs, limits stabilizer trim commands in response to an erroneous angle of attack reading, and provides a limit to the stabilizer command in order to retain elevator authority.
 
The 737 MAX was on course to become Boeing's fast-selling airplane, with over 4,600 on backlog order as of last month. At about $120 million a piece, that would total over $550 billion in sales in less than a decade, according to the expected delivery schedule.
 
And this explains the rapid rise in BA shares since their Jan 30 earnings report to new all-time highs above $440. The stock was suddenly trading at less than 20X forward EPS due to Wall Street analysts raising their estimates to keep up with this growth.
 
For the full-year 2019, Boeing is expected to see sales of over $111 billion, representing 10% annual growth. And profits per share are forecast to hit over $20 for a nearly 26% advance from last year. 
 
Those estimates will now come into question as some air carriers consider changing their orders to another plane, or another fleet altogether. But the stock is down 10% in just two days, back to $375. Long-term investors may want to stay the course. And new investors or traders should be on the watch for coming value opportunities.
 
There is plenty of uncertainty right now for Boeing and its suppliers and partners. While the investigation continues, everyone wants better answers. But those could take time.
 
Aside from Boeing as an investment, what we all want is more certainty about the safety and testing of new aircraft designs and procedures. Air travel has never been safer, regardless of how you measure it.
 
One of my favorite measures is the number of accidents per million flights. In the last decade, that ratio slipped under 1.0 and now it sits near 0.3.
 
And while some will decry too much automation, we wouldn't be here now talking about millions of safe passenger flights without the relentless technology innovation that made them possible.
 
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