On Sunday March 10th, Ethiopia’s deadliest incident took place when flight ET302 a Boeing 737 MAX 8, barely four months old, crashed shortly after take-off en route from Addis Ababa to Nairobi. All 157 people on board perished. Questions were immediately raised given this was the second Boeing 737 Max-8 plane to crash within the last 6 months. The other was a Lion Air plane which experienced erratic steep climbs and descents as well as fluctuating airspeeds before crashing shortly after take-off similar to the Ethiopian plane.
Global reaction was immediate, China’s aviation regulator gained global attention when it became the first to ground Boeing’s 737 MAX aircraft. China is the world’s biggest user of the 737 MAX planes, with its airlines flying 97 MAX planes out of a the global fleet of 371. Other aviation regulators were swift to follow the Chinese, grounding their fleets before asking Boeing questions over the safety of its 737 Max 8. The stock market reacted accordingly, as the shares fell 13% within minutes of opening on Wall Street the day after the crash, wiping nearly $40bn off Boeing’s valuation.
Who are Boeing? Boeing is the world’s largest aerospace company, a manufacturer of commercial jetliners, defence, space and security systems. It’s one of America’s biggest manufacturing exporters, if not the biggest, with annual revenues in 2018 of $101bn, net income of $9.5bn and free cashflow of c.$14bn. With corporate offices in Chicago, Boeing employs more than 140,000 people across the United States and in more than 65 countries. It’s current market value is $210bn.
So what does this mean for the stock?
Till we get some clarity of the cause and solution, risks remain, the potential fallout from the ongoing investigation will weigh on the stock price. The first order cancellation has come from Indonesia’s national carrier Garuda, a multibillion-dollar order for 49 Boeing 737 Max 8 jets, the company blaming passengers’ loss of trust in the aircraft. As Boeing has now grounded all its 737 Max-8 jets this appears to be the first formal order cancellation by a carrier but suspect Lion Air, Garuda’s rival may follow along with others.
- Getting back in service:The plane can’t get back in the air before investigators have reached preliminary conclusions regarding the cause of the Ethiopian crash. This could be days or weeks.
- Political Risk / Legal Risk – The Europeans and Canadians have already discussed assessing Boeing’s MCAS fix separate from the FAA regardless of what the FAA might conclude with their investigation. Oversight of future certifications of new Boeing planes by the FAA may take longer to complete. News of federal prosecutors’ involvement, which apparently began before the Ethiopian crash, surprised many people I would say and there is not much precedent for this according to some commentators.
- Airline compensation likely to remain an unknown. While not privy to the contract terms regarding Boeing’s obligations to airlines one can assume there will be some compensation, both for grounded aircraft and delayed deliveries. What this is in $ terms remains unknown
- Escalation of Trade tensions – The Chinese were the first to ground the Boeing 737 Max-8 jets, read what you want into that!
Many analysts/market believe that Boeing can recover from this given the reaction in the share price despite the tragedy of the Lion Air and Ethiopian planes. The company had issues in the past, maybe not to the same extent with the Dreamliner, but came out the far end. Boeing has significant financial strength, most of the costs could be temporary. Some analysts believe the free cashflow (estimates of $9-10bn) this year ex the MAX can help any inventory build of new 737 Max. On a FY20 PE of 15x, the stock is not overly expensive, though given the stock is up 12% year to date (in line with the S&P 500) despite the recent sell off, Boeing I feel is worth putting on your watch list. Any further weakness may be a good entry point, the consensus 12 month price target is $438 or about 20% upside from the current price.
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