Boeing (NYSE:BA) faces perhaps one of the biggest crises in its history. The company had staked much of its future on the 737 Max line of aircraft. However, with two crashes in the last five months, regulators and airlines have grounded the aircraft. Now, the repercussions not only extend to BA stock, but the airline industry in general.
I held a different view on Boeing stock as late as March 9. Until then, I would have cited the 50%-plus run-up in the early part of the year and the pension liabilities as the only reasons to avoid BA shares. The company had built up a seven-year backlog on plane orders. With the 21x price-to-earnings (PE) ratio and the five-year average annual profit growth rate of 22.1%, I considered BA stock a buy on any pullback.
After the second crash in less than five months, the problems with the 737 Max became too large to ignore. Now, many have lost confidence in Boeing’s leadership as it appears the company cut critical corners to get its plane in the air. This leads to three important implications.
Fundamentals Don’t Matter
It goes without saying that investors should avoid BA stock. Having lost trust in Boeing management, investors can no longer put faith in metrics such as PE ratios and growth rates. With the canceled orders and the delays in production this issue causes, investors will find it more difficult to value Boeing stock.
In a sense, Boeing stock will resemble the struggles with valuation that Micron (NASDAQ:MU) faces. Despite its trailing PE ratio of 3.6x, MU stock struggles to gain traction because traders do not trust the sustainability of their profits.
I don’t think this scandal will take the Boeing stock multiple down to that level. However, nobody knows what other issues will come to light from these inquiries. My colleague Chris Tyler’s comparison the aircraft maker’s troubles to the food safety problems at Chipotle (NYSE:CMG) illustrates the problem well. Like CMG in the recent past, new 737 Max revelations continue to undermine BA stock. Also, as he points out, recovering Boeing’s reputation will take longer since people have died because of the jet’s issues.
Boeing and FAA Must Regain Public’s Trust
Even more worrisome, many have lost confidence in the Federal Aviation Administration (FAA), the agency responsible for overseeing airline safety. The FAA now faces scrutiny from the Department of Transportation on the approvals it granted for the 737 Max to fly.
One long-term danger with regulatory agencies is that the regulated hold the most incentive to foster a relationship with the regulator. This appears to have happened with Boeing and the FAA. This seemingly cozy relationship may also explain why the U.S. was the last major country to ground all 737 Max aircraft. Now, mistrust of the FAA may become an obstacle for Boeing. Will anyone trust that Boeing has reformed itself when the public has lost faith in its regulator?
Airlines Flying Only 737s Could Face the Most Pain
The problems hold implications not only for Boeing stock but for the shares of its customers. Airlines such as Southwest (NYSE:LUV) and Ryanair (NASDAQ:RYAAY) fly only Boeing 737s. The dependence on Boeing that served them well for decades now has become one of their greater obstacles.
An inability to obtain more 737 aircraft will hamper their ability to offer more flights. Moreover, losing the existing 737 Max aircraft has forced these carriers to cancel flights. It will also lead to higher fares as passengers now have to fight for fewer available seats. Hence, not only will Boeing stock suffer, so will its closest partners.
Bottom Line on Boeing Stock
The implications of the recent crashes extend far beyond Boeing stock. The shares once looked like a buy on any pullback. Now with its crisis of confidence, investors should avoid BA stock for months and perhaps for years to come.
The challenges the company now faces make the metrics surrounding Boeing stock untrustworthy. Other vital stats such as the order backlog now become uncertain as customers cancel plane orders.
Moreover, BA stock could struggle longer as the public not only has to regain confidence in Boeing, they must also regain trust in the FAA. Furthermore, companies such as Southwest and Ryanair who depend exclusively on Boeing 737 aircraft could suffer. Not only can they not serve as many passengers, but they may also put expansion plans on hold due to a shortage of aircraft.
This crisis will become a buying opportunity in BA stock at some point. However, until the company can regain public trust, investors should avoid Boeing.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.