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Boeing: Hate the Story, but Buy the Stock

Posted on Wednesday, October 30th, 2019 by Chris Markoch

Boeing (NYSE:BA) is suffering through something that no company wants to go through. In late 2018 and early 2019, two separate Boeing 737 Max aircraft crashed that claimed the lives of 346 passengers and crew. Subsequent investigations have implicated the flight control system, the Maneuvering Characteristics Augmentation System (MCAS), as the reason for both crashes. 

Boeing stock is under pressure

In their most recent earnings report on October 23, the company reported earnings per share (EPS) of $1.45. This was down from analysts’ expectations for $2.04, a nearly 29% decline. BA stock is down over 20% since March 1 when the second crash occurred. In advance of earnings, the stock tested its August 14 low when it dipped to around $331 per share. The stock has since rebounded and remains higher for 2019. However, the stock still lags behind the broader market. 

Interestingly, the stock has largely moved sideways during Mullenberg’s testimony. The stock jumped over 2% on Tuesday, before falling back about one percent during Wednesday’s testimony. That coincides with the pattern that has been in place since the company released its earnings. 

Analysts recently lowered their price targets for Boeing stock leading some investors to wonder how much upside exists in the short term. 

A CEO under fire

This week Boeing CEO Dennis Mullenburg appeared before two separate Congressional Committees. On October 29, Mullenberg was grilled by the Senate Commerce Committee. Then on October 30, the beleaguered CEO testified before the House Committee on Transportation. The hearings mark Mullenberg’s first public testimony since the tragedies.

The largest questions that continue to hang over the company are the questions no company wants to have to answer. What did they know? When did they know it?

Just this month, the Joint Authorities Technical Review – a panel assembled by the FAA – released a report that confirmed that information about the MCAS was absent from pilot training manuals and that Boeing withheld details from the FAA during the certification process. Then about a week before earnings, text messages emerged showing that Boeing employees were discussing problems with the MCAS system as early as 2016.

The hearings were the first admission from the company that the modified design of the aircraft was flawed and that pilots were not adequately informed about the new design. Both of these errors allowed Boeing to bring the planes to market faster than they would have been allowed to do were the company launching all-new aircraft. 

 “On behalf of myself and the Boeing company, we are sorry, we are deeply and truly sorry,” Muilenburg said, “We’ve made mistakes and we got some things wrong.”

How do you put a value on human life?

There is no way to adequately quantify the human cost for Boeing. A poignant part of the hearings was that they were attended by families of the crash victims. It’s a reminder that whatever the financial loss to Boeing, and Boeing shareholders, it will ultimately be a finite number. The larger public relations issue is how Boeing will rebuild the trust of travelers who may simply choose not to fly on the 737 Max, even after they gain regulatory approval. 

It is only natural that investors will be angry at the company executives who clearly, at best, did not want to know about the design flaws in the flight control system. There will be no satisfactory resolution for the hundreds of families who lost loved ones. 

There is good reason to hate Boeing stock right now. But … 

The long-term story for Boeing is positive

When it is re-launched, the 737 Max will be perhaps the safest aircraft in the skies. And although it may be quite sometime before the planes are approved, the reality is the planes will be approved at some point. In fact, during General Electric’s earnings call on October 30, the company said they expect the 737 Max to be flying again by the end of 2019. 

And Boeing, along with Airbus, make up two parts of a duopoly in the aerospace market. Boeing and Airbus make up 99% of all global large plane orders. Plus, aircraft are one of the leading exports of the U.S. for many years. The reality is that the financials for Boeing look strong for the foreseeable future. 

If you are a current shareholder of Boeing, you should make your voice heard. The company will need to take tangible actions to restore trust. But as an investor, you have to keep your investment goals in perspective. So when it comes to Boeing, and it may be unpopular to say, but now is a time to hate the company, but love the stock.

 

Companies Mentioned in This Article

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Boeing (BA)$341.67flat2.41%21.34Hold$378.87

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