Merrill Lynch Has Turned Sour on Boeing (BA) Stock


What was once thought to be a “blip on the radar” is turning out to be a much larger challenge for Boeing (BA).

The aircraft manufacturer has been in hot water since last month, when a second brand-new 737 Max airplane crashed in a six-month span. Though the company had portrayed a sense of calm, it seems that there is more to worry about than originally thought. Last week, the company said it would decrease 737 production by 19% this year, including producing only 42 monthly vs. the expected ramp up to 57/month.

In reaction, Merrill Lynch analyst Ronald Epstein has downgraded BA stock from Buy to Neutral, while lowering his price target from $480 to $420. (To watch Epstein’s track record, click here)

Boeing’s announced cut in 737 production shows the analyst the 737 delay could last longer than previously expected. He now estimates 6-9 months of disruption vs. his previous estimate of 3-6 months. Epstein cites the importance of the 737 to Boeing, calling it the companies “most profitable program,” as it “accounts for about 40% of total company EBIT.”

As a result of the two crashes and subsequent fix, Epstein says Boeing faces a slew of liabilities, including “related to certification and testing costs, late delivery penalty to airlines, lives lost from the Ethiopian Airlines flight ET 302 and Lion Air flight JT 610, and production disruption penalties to suppliers.” But while the financial penalties are expected to hurt, “the reputational loss from these events could erode long-term market share and pricing power of the 737 MAX,” Epstein says.

As a result of the 737 delay, Epstein is lowering his estimates for the company. He says, “from 2019E-2023E, we lower our cumulative EBIT by $13.7bn, our free cash flow by $14.3bn, and share buybacks by $8.2bn. The net changes lower our Boeing core EPS to $11.80 from $20.10 in 2019E, to $20.60 from $24.05 in 2020E, to $25.05 from $27.70 in 2021E, to $24.75 from $29.90 in 2022E, and to $26.60 from $32.00 in 2023E.” As a result of lower estimates, Epstein is updating his “model and valuation to reflect our new base case scenario for Boeing.” with a downgrade to Neutral from Buy.

Overall, BA has drawn optimism mixed with caution when it comes to consensus opinion among sell-side analysts. Out of 23 analysts polled in the last 3 months, 14 are bullish on Boeing stock, 7 remain sidelined, while 2 are bearish on the stock. With a potential upside of 16%, the stock’s consensus target price stands at $428.11. (See BA’s price targets and analyst ratings on TipRanks)

 

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