The 737-MAX scandal took a hammer to the results of Boeing (NYSE:BA), but investors basically shrugged their shoulders.
The company reported a loss of $2.94 billion, $5.21 per share, on revenues of $15.7 billion on July 24. Revenue was down 35% from last year’s $24.25 billion. The results missed even the most pessimistic estimates of analysts.
Despite this, shares fell by less than 1%. They opened for trade 15% ahead of where they were at the start of 2019, in line with the average S&P 500 stock. Analysts remain bullish about Boeing in the short, medium and long term.
Investors who might have thought the crisis would do long-term damage to the Boeing brand, as happened with Wells Fargo (NYSE:WFC), now seem to think this will be a hiccup from which bulls can profit, as happened at Chipotle Mexican Grill (NYSE:CMG).
To many people, it tastes like a nothingburger.
The Boeing Stock Disaster Grinds On
The 737 MAX scandal, which began with two air crashes of the 737 MAX 8 last year in Indonesia and Ethiopia, is still not over.
The planes were grounded in March and remain grounded. In a closed-door briefing Boeing could not even be precise about when they might come back into service.
Airlines most dependent on the 737, like Southwest Airlines (NYSE:LUV), have seen greater impacts on operations, and their stocks, than those using a variety of aircraft models, like Delta Air Lines (NYSE:DAL). But both stocks are up on the year.
While it may seem that Boeing hasn’t been badly hit by the scandal, that’s because it has been covered up by the airline and airplane market’s steep rise in 2019.
Boeing has fallen behind Airbus (OTCMKTS:EADSY) in the airliner market, and that deficit is expected to get worse. Defense analysts say Lockheed Martin (NYSE:LMT) has passed Boeing as the most-favored defense contractor. This could impact the more-successful side of its business.
Eric Lindblad, program manager for the 737, is quietly being retired but the planes will likely still be out of service during the busy Thanksgiving and Christmas season.
Why, then, do analysts remain so optimistic?
The Bull Case
While analysts have cut price targets on Boeing, those are still 20% higher than where the stock was due to open for trade July 24, at $373 per share.
Part of that comes from Boeing’s continued strength in defense orders. Part of it comes from the 2,000 orders Boeing has for the 777. But Boeing has told analysts the delivery schedule on the latest version of that plane., the 777X, may now slip because of the 737 scandal.
Boeing has estimated the earnings cost of the scandal at $5.6 billion, plus $1.7 billion in additional costs. Getting a cost number seemed to satisfy analysts who suggested investors buy the stock ahead of earnings.
The best summary of analyst attitudes is that of Vertical Research Partners analyst Robert Stallard, who said it could have been worse. He set a one-year price target of $413 per share, 11% higher than the July 24 opening.
At its July 24 price, Boeing is selling for over 21 times last year’s earnings, higher than the average stock, and the dividend of $2.05 per share yields 2.2%, slightly more than a 10-year U.S. government bond.
The Bottom Line for BA Stock
Boeing’s scandal has not created a bargain for investors.
It takes years for aircraft makers to deliver a plane after it’s ordered, and Boeing still has a significant backlog. Boeing remains the second-largest U.S. defense contractor, taking in over $27 billion during fiscal 2018.
This seems enough for the bulls. It’s not enough for me.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
