It seems as if Boeing’s (BA) 737 MAX fleet will be grounded for longer than analysts expected, as a new glitch was exposed during test pilot’s use of the plane in its flight control system. This glitch is separate from the anti-stall system that caused two crashes which killed 346 people. It was found during simulation tests, and Boeing will be required to correct the problem before being allowed to take its pre-certification flight. If this issue is a software problem, the delay should not be too long, but if it is a hardware issue the delay will be significant.
Following the second crash in March, the plane has been grounded worldwide. Deliveries have been halted, and as a result, production has been cut to 42 737 MAX planes a month.
Cowen analyst Cai Rumohr has Boeing stock as his #1 pick. Rumohr maintains his Outperform rating on Boeing with a price target of $460. (To watch Rumohr’s track record, click here)
He believes that this latest change in the 737 MAX timeline indicates that Boeing can expect certification by late September. Foreign airlines will follow the FAA’s lead, and because foreign regulators were incorporated into the FAA’s process, international approval should quickly follow the FAA’s decision.
The 737 MAX crashes and subsequent grounding has left Boeing with a growing stockpile of MAX inventory. It will take Boeing a while to reduce this inventory of completed planes. Rumohr estimates that Boeing’s completed inventory will total 270 to 280 planes by September 30th. Since the record number of monthly 737 MAX sales was 69 last December, it will take a while for BA to unload these planes. Rumohr believes that MAX deliveries will reach 110 by December and average 90 for the 4th quarter, assuming the plane gets approval from the FAA in late September. At the end of 2019, Rumohr estimates that Boeing will have around 135 to 140 completed but undelivered MAX planes.
Boeing’s buyback program will be put on hold until at least mid-2020, according to Rumohr. This is understandable given the high variance nature of the situation, and Boeing is right to focus on getting its best-selling aircraft back in the air. Although Boeing’s cash will be drained in the short-term, Rumohr expects “a healthy snapback in 2020-21, aided by [a] 737 rebound, rising 787 contribution, and abating 777X start-up impact.”
Rumohr is very bullish on Boeing and he is not alone on Wall Street. TipRanks analysis of 16 analyst ratings for BA over the last three months shows that there is a Strong Buy consensus on BA. 12 analysts have Buy ratings and 4 have Hold ratings. The average price target on Boeing is $435.07, which represents a 23.6% upside from the current share price. (Click here to see BA’s price targets on TipRanks)