Due to rapidly-rising geopolitical tensions, I have a long-term bullish perspective on the defense industry. But Boeing (NYSE:BA) has robust exposure to both civilian and military applications, making it an appealing package. Under normal circumstances, I’d wholeheartedly recommend Boeing stock. However, recent events make BA a tricky call.
Specifically, I’m referring to Indonesia’s Lion Air Flight 610 that crashed on October 29th, killing all onboard. After digesting the awful human tragedy, the finger-pointing began. At the center of the controversy is the airplane involved in the accident, a Boeing 737 Max.
The Max represents the latest version of the venerable 737 series. As such, it features technological upgrades that supposedly make the plane safer to operate. A key improvement, the Maneuvering Characteristics Augmentation System (MCAS), is integrated in the 737 Max, but not in older versions.
Both Boeing and Lion Air agree that the critical malfunctioned occurred in the MCAS. That admission alone presents a worrying headwind for BA stock. According to the accident investigators, Lion Air’s flight crew struggled with the MCAS, which constantly pushed the airliner’s nose downward.
From the evidence available, outsiders arrive at a logical conclusion. Without this new “improvement,” Flight 610’s passengers and crew would likely still be alive. Obviously, this is terrible PR for Boeing stock.
Moreover, Lion Air claimed that BA failed to educate the company about MCAS, and how to respond in an emergency. Another damning indictment against BA stock: multiple airliners, including Southwest Airlines (NYSE:LUV) and American Airlines (NASDAQ:AAL), support Lion Air’s accusation.
However, Boeing pushed back, stating that standard operating procedures would have address the MCAS failure. Also, a Lion Air ground crew may have inadvertently tampered with the MCAS sensor on the doomed flight.
Boeing Stock Hangs on a Delicate Thread
Right now, I believe Lion Air has the stronger argument. While the flight crew may have responded inappropriately, and the ground crew may have erred in the maintenance process, BA has an absolute responsibility to inform all parties about MCAS. Not doing so is negligent.
However, I reached my conclusion without the benefit of the cockpit voice recorder (CVR). This would show how the pilots responded to the malfunction. And just recently, Indonesian investigators recovered the CVR.
Finding the CVR was a stroke of luck. In about two weeks, the device’s acoustic beacon which pings its location would have died. At the same time, it could also spell trouble for Boeing stock if the CVR confirms Lion Air’s side (as well as Southwest’s and American Airlines’).
With the CVR, investigators can have a true glimpse into the flight crew’s mindset. If any indication exists that the pilots attempted to regain control through standard measures but failed, the fallout may significantly harm BA stock.
For one thing, Boeing has largely been on the defensive. Rather than offer viable theories, they’re denying Lion Air’s accusations. These denials include rebuttals that BA provided adequate information on dealing with MCAS-related emergencies.
An analysis of the CVR may evaporate either party’s explanations or accusations. But even if the cockpit recording suggested pilot error, Boeing stock still has a problem. In this case, the error didn’t occur in a vacuum. The culprit still remains the MCAS.
In my opinion, the cockpit recording only has two outcomes for BA stock: bad news or really bad news. Either way, Lion Air asks the same question: why did you provide airliners with faulty technology?
It doesn’t help that the Federal Aviation Administration warned 737 Max pilots about the MCAS system following the accident. Such announcements indict the system, not the pilot.
Be Patient With BA stock
I’m not saying Boeing stock is done. As I mentioned earlier, I have a longer-term perspective on defense companies. Militarily and politically, Boeing offers multiple contributions, not the least of which is Air Force One.
Furthermore, management has significantly expanded its footprint. For instance, its partnerships with multiple Japanese companies to produce next-generation electric-propulsion airplanes appear promising. Japan eagerly wishes to grow its burgeoning aviation industry. If the country achieves half the success it did with automobiles, the Boeing-Japan partnership will reap significant profits.
But in the meantime, this Lion Air controversy isn’t going away. The airline previously threatened to cancel a $22 billion order. Depending on the results of the investigation, we may have massive lawsuits flying around.
For me, the bottom line is that serious distractions exist. With BA stock gyrating wildly in the past few months, I’d wait on the sidelines. You may regret a few missed percentage points. On the other hand, you might save yourself heartache if this ugly incident doesn’t go Boeing’s way.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.