With the 737 Max out indefinitely, turbulent times lay ahead for Boeing (BA) stock.
The world’s largest aerospace manufacturer is facing considerable headwinds as it tries to not only ensure the 737 Max is flyable, but to convince regulators that no additional oversight is needed and the public that the plane is actually safe. Following two deadly crashes in a six-month period involving the faulty MCAS system on the Max, regulators across the world grounded the plane until the problem was fixed.
In the two months since the second crash, Boeing stock has fallen nearly 20%. However, analyst Seth Seifman of J.P. Morgan remains a buyer, maintaining his Overweight rating on Boeing stock, with $430 price target, which implies nearly 24% upside from current levels. (To watch Seifman’s track record, click here)
Last week, Seifman met with Boeing management with a focus, obviously, on the 737 Max. The analyst says May 23rd is a big day for Boeing, as the FAA will provide more clarity on how it will handle the current situation. While Seifman believes there is no guarantee that the FAA will have approved Boeing’s flight control software modifications by then, he does not rule that out either.
While how the FAA moves largely out of Boeing’s control, Seifman points out that the company is using the lower production (42/month) of the Max “to bring the supply chain up to rate (52/month, in most cases) and move past the production challenges it has encountered in 2018 and early 2019.” This deceleration allows Boeing to regroup and ensure that “the whole supply chain producing reliably at 52/month before going further.”
Besides putting the 737 Max back into the air, Boeing is expected to face compensation demands from airlines. Seifman assumes that “compensation will happen on an airline by airline basis, not globally, and that it will take many forms, given airlines’ ongoing relationships with Boeing, what they value, and the ledger of what each owes the other at this point in time.” So while the analyst was not able to get an answer from the company, he does see this taking shape in one way or another. Nevertheless, while Seifman sees “the potential for some of this compensation to flow into the 737 cost pool…with 3,000 aircraft in there,” the analyst believes “the impact on the booking rate is unlikely to be outsized.”
All in all, Boeing’s stock has come under pressure since the second crash about two months ago. But many see this as a buying opportunity, given that this is probably a short-term challenge, rather than a long-term problem. TipRanks analysis of 22 analyst ratings shows a consensus Moderate Buy, with 12 analysts Buying, eight Holding and two Selling. The average price target among these analysts stands at $437.73, suggesting the stock can rise about 26%. (See BA’s price targets and analyst ratings on TipRanks)
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