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Bear of the Day: Boeing (BA)

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It’s been more than a year since the first fatal accident involving Boeing’s (BA - Free Report) 737 MAX aircraft and 10 months since the second crash and the subsequent worldwide grounding of the company’s most popular – and most profitable – plane.

Boeing shares took a hit on the initial news, especially the revelations that an advanced control system that had been added to the aircraft – ostensibly to make it safer – had likely contributed to both accidents as the pilots struggled to control the planes after the MCAS system took over to prevent a stall that wasn’t actually happening.

Troubling internal memos that Boeing eventually turned over amid a Congressional investigation indicated that Boeing engineers and test pilots had doubts about the safety and effectiveness of the MCAS system during the development process, yet their concerns went unheeded as the workhorse 737 became an increasingly complicated machine.

The shares tumbled from an all-time closing high of $440 in March 2019, but held fairly steady in the $350-$380 range, largely because even as Boeing temporarily suspended production of the MAX, they retained outstanding orders for the plane that stretched 5-10 years into the future. Investors believed that any revenue shortfall would be fairly quickly made up once the MAX was back in the skies.

There’s no sign of an imminent certification for the 737 Max to resume commercial flights and even the most optimistic estimates now anticipate that the middle of 2020 is the earliest possibility. Former Boeing CEO Dennis Muilenburg was ousted by the board of directors and his replacement David Calhoun has been incentivized with a possible bonus of up to $7 million if he achieves several milestones – chiefly overseeing the return of the 737 MAX to the skies.

The spread of the deadly Coronavirus and a corresponding severe drop-off in air travel to, from and within China has added to fears of softening demand for new aircraft orders.

The most recent Boeing annual report issued at the end of January shows the effect of the 737 grounding in stark detail.

Revenue was down 25 percent between 2018 and 2019, from $101.1 billion to $76.6 billion. Operating cash flow had been $15.3 billion in 2018 turned into an operating loss of $2.4 billion. Core earnings of $16.01/share in 2018 became a net loss of ($3.47)/share in 2019.

Recent analyst downward revisions earn Boeing a Zacks Rank #5 (Strong Sell).

The earnings presentation also included a frankly worded warning about the potential impact on future results. Boeing cited the timing and conditions of regulatory approvals, the ongoing production rate and delivery profile and an estimated $4B of “abnormal” production costs to be expensed as incurred, but primarily in 2020. Those are expenses associated with the suspension of production and the eventual resumption of production at low output.  

Management noted that they are prudently managing liquidity and preserving balance sheet flexibility – a worthy endeavor, but hardly the encouraging language of a company that’s firing on all cylinders.

Boeing is a veritable titan of US engineering and manufacturing and it’s likely that once the 737 mess is resolved, the company will regain its positive earnings trajectory. For the time being however, investors would be wise to steer clear of Boeing until the timing of the recovery is more clear.

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