Boeing Co (NYSE:BA) stock has crashed, having dropped 11% in the last 11 sessions through yesterday. Boeing stock is now down by a quarter from the all-time highs it reached in early March.
The issue that has bedeviled Boeing Co over the past five months has been the tragic crashes of two 737 MAX 8 aircraft, one in Indonesia and the second in Ethiopia. Over the past two-plus weeks, there has been a growing sense that BA isn’t going to resume production of the MAX as soon as the owners of Boeing stock and Boeing Co management had hoped.
Boeing Co already took a $4.9 billion charge for MAX-related costs in Q2 . BA stock has weakened recently, partly because investors are worried that more such costs are on the way. Boeing keeps promising that the MAX will return to service relatively soon. It hasn’t happened, and it doesn’t appear like it will before the end of this year.
Until the issue is resolved one way or the other, Boeing stock isn’t going to move much. Whether the shares can rebound eventually depends on whether the company can ever get the MAX flying again. Right now, even that is far from guaranteed.
When Will the MAX Fly Again?
Not long after the second crash, many industry participants and observers – including Wall Street analysts – believed the 737 MAX would be back in the air relatively quickly. American Airlines Group (NYSE:AAL), for instance, originally only cancelled 737 MAX flights through Apr. 24.
Those predictions have proven to be wildly optimistic. Instead, deadlines have been pushed further and further out. American now has pulled the MAX from its schedule through Nov. 2. Southwest Airlines (NYSE:LUV) last month became the first company to rule out the 737 MAX for all of 2019.
For its part, Boeing is a bit more optimistic. CEO Dennis Muilenberg estimated on the company’s Q2 earnings conference call that the MAX could return to service “early in the fourth quarter.” But as shown by the comments of Boeing’s customers, many even in the industry don’t necessarily believe the Boeing Co CEO. As a Ryanair (NASDAQ: RYAAY) executive put it last month, “I am concerned at the way the MAX return to service keeps slipping.”
And there are reasons for that skepticism. In late June, the FAA discovered a flaw in the MAX software that had to be fixed. That came just two weeks after an FAA regulator estimated the aircraft would be back in the air by December. The delay caused by that software fix, in theory, will delay the return of the MAX until 2020. And that’s a problem.
Why the MAX Is a Problem For Boeing Stock
It’s tempting to say that pushing out the MAX’s return to service by a few months doesn’t really matter for Boeing Co or for Boeing stock.
Indeed, from an earnings standpoint, delaying the MAX’s return by a quarter or two shouldn’t make that much of a difference. After all, it’s not like airlines can necessarily go elsewhere.
Boeing’s main competitor, Airbus (OTCMTKS:EADSY), already has an enormous backlog. There aren’t any other narrowbody manufacturers out there. Airlines can either fly the MAX or, basically, not fly at all. That’s why, as one analyst has put it, the 737 MAX is “too big to fail“.
But there are two key issues with that relatively nonchalant attitude. First, the delays have real costs. Boeing has to reimburse airlines for their lost revenue, to the tune of billions of dollars. Even though the market cap of Boeing stock is in the $190 billion range, those expenses are getting material, as evidenced by the $5.6 billion total hit to the company’s Q2 earnings.
Second, the delays keep the concerns of passengers and regulators from fading. They are ultimately the ones who matter. If even a small minority of passengers won’t fly on MAX planes, the profitability of airlines, and thus the demand for Boeing Co planes, will be negatively impacted. And if regulators anywhere in the world refuse to sign off on the MAX, demand for the planes can be reduced.
Again, it’s tempting to see the decline of BA stock as a buying opportunity driven by investors and analysts who are focused on the short-term. But the point is that the short-term affects the long-term value of Boeing stock. Each month that goes by increases Boeing’s costs and the risk facing Boeing stock.
BA Stock Is a Bet on the MAX
All that said, it does seem like if Boeing can get the MAX flying again at some point, BA stock probably is too cheap. Wall Street analysts still, on average, expect the company’s earnings to rebound, and anticipate a return to a positive earning trend; their average 2023 EPS estimate is $31.
Conservatively assuming that Boeing stock’s price-earnings multiple will be in the mid-teens, if Boeing Co meets that EPS estimate, BA stock would return a healthy 10% per year plus 2.5% in dividends. Given that Boeing stock recently had a PE ratio of 20+, that outlook might even be conservative.
But the risks facing Boeing stock are significant and have to be priced into the shares. I’d wager many passengers, particularly those who are uncomfortable with flying in the first place, might refuse to ever fly on MAX planes.
And regulators outside the U.S., in particular, may be much less likely to put their professional reputations on the line for a model that already has crashed twice.
Meanwhile, Boeing’s defense business largely is immune to the MAX issues. But, as InvestorPlace contributor Dana Blankenhorn noted, Boeing Co appears to be falling behind rivals like Lockheed Martin (NYSE:LMT) when it comes to defense.
And Boeing’s defense business has had its own execution issues. Specifically, debris has been left inside its aerial tankers. As a result the Air Force has withheld some $360 million in payments to Boeing.
Forced to choose, I’d bet Boeing gets through this mess, delivers much of its MAX backlog, and returns to earnings growth. And that almost certainly would enable BA stock to climb, given the growing demand for air travel in the developing world and even parts of the developed world.
But timing matters. And the risks are real. It’s hard to pound the table too forcefully on Boeing stock when the company isn’t making much progress in tackling the biggest of those risks.
As of this writing, Vince Martin has no positions in any securities mentioned.