Boeing Stock is Not Telling the Whole Story

The steady stream of bad news continues for Boeing NYSE: BA. The company has had a difficult time getting regulatory approval that will get its fleet of 737 Max aircraft back in the air. As you are most likely aware, the 737 Max fleet was grounded in March of this year after the second of two crashes.

Boeing will deliver its quarterly earnings report on October 23. The company’s struggle to give the market firm guidance on the status of the 737 Max fleet will be the focus of the company’s conference call. Of particular interest to the market will be if the company will be able to have planes in the air by the first quarter of 2020. Boeing had originally said they were expecting to be delivering planes in the fourth quarter of 2019.

The production of the 737 Max came under even closer scrutiny after an October 18 bombshell. Text messages from 2016 show a top pilot brought up concerns about the flight control system in the company’s 737 Max aircraft. That flight system, the MCAS, has been implicated in both of the crashes in which 346 people lost their lives. Those revelations from 2016, prior to the plane’s certification, are leading regulators to accuse Boeing of improperly reporting documents about the Max shortcomings.

The last straw for analysts?

This revelation was the last straw for at least three analyst firms. Boeing stock was downgraded by Credit Suisse and UBS. Credit Suisse slashed its price target from $416 to $323, while UBS lowered its price target for the stock to $375 (from $470).

Bank of America maintained the company’s hold rating but lowered its price target to $370 (it was $400). However, the consensus price target for BA stock remains, for now, at $412. That would be an increase of over 20% of the current BA stock price.

“In our view, there is increased uncertainty related to the 737 Max’s (return-to-service) timeline, Boeing’s culture, brand, and corporate governance,” the BofA analysts led by Ronald Epstein, said in a note on October 18. “We now expect Boeing to trade at a 25% discount to the S&P 500 valuation (vs. prior 15% discount).”

Boeing stock has remained resilient, but that may be ending

Although the news surrounding the stock has been undeniably poor, the stock has stayed remarkably solid. As of this writing, BA’s stock price was $337.76. It has stayed positive for 2019 and remains above its 52-week low set on December 24, 2018. On that day, BA closed at $292.47. The company also announced that it will issue a dividend and maintain the current payout of $2.05 per share.

However, in recent days the stock is now negative over the last 12 months, which was right about the time when the first of the two crashes took place. And the stock is down nearly 25% from its 52-week high of $446.01 set in March.

Boeing is one part of a duopoly

The most common reason cited for the resiliency of Boeing stock is that the company, along with Airbus, make up a duopoly. According to the Teal Group, an analysis company for the aerospace market, these two players make up 99% of global large plane orders. And those orders make up 90% of the total plane market. And when you consider that the aircraft category has been the leading export of the United States for a long time, you can see why investors may feel there is a moat around the stock.

Boeing is facing an absence of trust

A cold reality of investing is that the market can forgive an aircraft manufacturer, such as Boeing, for defects in a plane’s design. This is true even if that defect resulted in the loss of life. In such cases, the markets look to regulators to ensure the safety of future aircraft.

In the case of Boeing however, the market has to feel a bit like the proverbial woman scorned. For months, the company was telling the market that an investigation would show that the company had nothing to hide.  The text message revelations indicate that the company was indeed aware of potential problems with the MCAS system.

According to analysts, the internal messages reinforce “the perception of and heightens the potential of incomplete disclosure, which inherently puts more money/trust & time at stake.”

But beyond rebuilding the trust of investors, Boeing will first have to restore the trust of regulators. That may prove to be a more difficult challenge.