Boeing To Pay $2.5B To Settle 737 MAX Fraud Charges; Top Analyst Says Hold

Boeing has agreed to pay $2.5 billion to settle conspiracy defraud charges related to a probe into two fatal crashes of its 737 MAX aircraft in Indonesia and Ethiopia that killed 346 people. Shares declined less than 1% in Thursday’s after-market session

As part of the settlement reached with the US Department of Justice, Boeing (BA) will pay a penalty of $243.6 million and has committed to $500 million in additional compensation to the families of those lost in the Lion Air and Ethiopian Airlines accidents. The agreement also includes $1.77 billion in compensation to Boeing’s airline customers who incurred financial losses resulting from the grounding of the 737 MAX aircraft. In exchange, the Department of Justice has agreed to defer prosecution, provided that Boeing abides by the obligations determined in a three-year deferred prosecution agreement, after which time the charge will be dismissed.

According to the Department of Justice, Boeing admitted in court documents that two of its 737 MAX technical pilots deceived the Federal Aviation Administration’s aircraft evaluation group by concealing information about an aircraft safety system called the Maneuvering Characteristics Augmentation System (MCAS) that impacted the flight control system of the planemaker’s 737 MAX. As a result, a key document published by the FAA lacked information about MCAS, which in turn led to missing information about the safety system in airplane manuals and pilot-training materials for US-based airlines.

Following the investigations into the Lion Air crash in Indonesia in 2018, the two 737 MAX technical pilots continued deceiving Boeing and the FAA about their prior knowledge of the change to MCAS, the Department of Justice said.

“The tragic crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302 exposed fraudulent and deceptive conduct by employees of one of the world’s leading commercial airplane manufacturers,” said Acting Assistant Attorney General David P. Burns of the Justice Department’s Criminal Division. “Boeing’s employees chose the path of profit over candor by concealing material information from the FAA concerning the operation of its 737 Max airplane and engaging in an effort to cover up their deception.”

Meanwhile, Boeing also announced that the company expected to take a $743.6 million charge against its fourth-quarter earnings to account for the commitments under the agreement. The planemaker added that it had put aside reserves of $1.77 billion in prior quarters related to the compensation of 737 MAX customers.

“I firmly believe that entering into this resolution is the right thing for us to do – a step that appropriately acknowledges how we fell short of our values and expectations,” Boeing CEO David L. Calhoun wrote in a note to employees. “This resolution is a serious reminder to all of us of how critical our obligation of transparency to regulators is, and the consequences that our company can face if any one of us falls short of those expectations.”

Coming now to BA’s stock performance, shares are down 37% over the past year as COVID-19 travel restrictions have resulted in a deep cut in the number of commercial jets and services Boeing customers need over the next few years. (See BA stock analysis on TipRanks)

Commenting on the settlement agreement, Cowen & Co analyst Cai Rumohr reiterated a Hold rating on the stock with a $225 price target (5.8% upside potential), and said called the pact a step towards resolving claims.

“BA’s DoJ [Department of Justice] agreement appears to settle its criminal liability exposure from the MAX crashes; and because the $1.77B of airline compensation was previously reserved and paid, the incremental financial liability is lower than the $2.5B headline suggests,” Rumohr wrote in a note to investors. “Net of est. tax savings from the victims’ compensation payments, we estimate that the Q4 charge will be $634MM after-tax or $1.10/share (assumes theDoJ penalty is not tax-deductible).”

The analyst noted that the agreement did not preclude additional claims from the crash victims’ families.

The rest of the Street is in line with Cowen’s outlook. The Hold analyst consensus is based on 7 Holds, 4 Sells, and 8 Buys. That’s with an average analyst price target of $227.69, indicating 7% upside potential over the coming 12 months.

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