Following two crashes in under six months, governments and airlines across the world are grounding Boeing’s (BA) 737 Max 8 aircraft. While crashes always bring high scrutiny to aircraft manufacturers, this one is a bit different. Not only have both crashes involved the same model — virtually unheard of in such a small time frame — but the 737 Max 8 is brand new. While it is not uncommon for manufacturers to face challenges after a new launch (as was the case with the 787 Dreamliner late last year), this goes beyond what is expected after first commercial flights.
On Wall Street, Boeing’s stock has suffered greatly, diving over 10% since the crash. Nevertheless, Canaccord analyst Kenneth Herbert maintains his Hold rating and $380 price target, which implies a slight downside from the current share price of $374. (To watch Herbert’s track record, click here)
According to an FAA grounding order implemented Wednesday, the two crashes — the first in the Java Sea in October, the second this past week in Africa — show similarity based on satellite imagery. Herbert believes “the noise around the software fix and potential implications for Boeing’s 2019 FCF will be a headwind for the stock.”
The main challenge for Boeing is updating the Maneuvering Characteristics Augmentation System (MCAS) software, a new safety feature on the 737. Herbert believes “the direct expense of implementing the software upgrade” is one of the financial risks to Boeing in the short-term.
Furthermore, as the analyst believes the best-case scenario is a a 6-8 week week grounding, he highlights “risk from delivery delays and progress payments on in-progress aircraft.” But this is also assuming the two crashes were as similar as initially believed, and that an update to only one feature is necessary. If it is determined that the crashes were different, the recovery time could be even longer.
Herbert sees a ~$500 million fix for Boeing, but is “not yet adjusting” 2019 estimates. The analyst says, “as a base case, we see the immediate fix as a ~$500M investment. We then see the grounding leading to a ~$1B in monthly lost FCF from delivery delays and the potential loss of advancements on in-process aircraft (eventually recovered). We then see the potential monthly risk of up to another ~$1B depending on how much of the airline operating revenues BA ultimately reimburses. We expect this to be a much smaller number than the potential, but we do expect some recovery here paid by Boeing to the airlines for the disruption.”
While crashes are not new for Boeing, the company is in uncharted territory with two of the same models crashing within six months. Nevertheless, given Boeing’s track record, it being the largest player in US aviation and its new models to come, many do not see long-term challenges for the stock. TipRanks analysis of 21 analyst ratings shows a consensus Moderate Buy, with 15 analysts Buying, four Holding and two Selling. The average price target among these analysts stand at $434.06, suggesting a 16% upside.(See BA’s price targets and analyst ratings on TipRanks)