After trading mostly sideways for the past five months, shares of Boeing (NYSE: BA)
finally started to look ready to break out to the upside after Wednesday’s session. There’s still a long road ahead of them before they’re back trading at pre-COVID levels, but yesterday’s update on their 737 MAX plane means it’s more realistic now than at any point since March
The Federal Aviation Authority (FAA), it was announced, have rescinded their ban on commercial operations involving 737 planes. This comes after extensive retesting and recertification and allows domestic airlines to begin taking steps to purchase and fly the plane.
Having experienced two tragic crashes due to technical malfunctions in 2018 and 2019 respectively, the FAA had grounded the model and halted all of its commercial operations in a bid to avoid further catastrophes. Given the plane formed the bulk of Boeing’s future orders from airlines like American (NASDAQ: AAL) and Southwest (NYSE: LUV), the decision was a serious blow to their revenue stream. The company’s misfortunes were compounded in the first quarter of this year with the onset of the coronavirus pandemic, which dealt a fresh blow to the airline industry and the already beleaguered Boeing. Though they entered the year with a market cap of around $200 billion, by March they’d shed 75% of that as investors dumped it en masse.
Horizon Getting Brighter
But as economies have reopened and TSA airport traffic numbers continue to recover since the summer, many airline stocks have found a strong bid in their shares. Boeing has been a step or two removed from this though and investors were still waiting for the downtrend to turnaround as of the start of the month. But with the recent announcement of a coronavirus vaccine potentially being available as early as next year, shares have been able to rally close to their post-COVID highs in the past week.
This update from the FAA is another bullish catalyst that’s been a while in the making and will allow Boeing to become a feasible investment once again for many funds around the world who were otherwise staying away. Indeed, in light of yesterday’s news, Baird upgraded shares from Neutral to Outperform. Analyst Peter Arment wasn’t slow about pointing to the massive fresh recovery potential that’s been injected into the stock and gave them a street high price target of $306. From yesterday’s close, this suggests upside of about 50% which is sure to raise a few eyebrows. It’s likely they’ll be joined by more sell-side firms reevaluating their rating on the stock in the coming days.
Still A Long Way To Go
That being said and as mentioned above, there’s still a long and tough road ahead for Boeing before they can return to anything close to the old normal. American Airlines have already made it clear that passengers will have flexibility when it comes to choosing if they fly on a 737 MAX while Southwest won’t be flying it in a commercial capacity before the second half of next year. Their CEO Gary Kelly also made it clear that "thousands of hours of work and inspections” need to be done before they’re comfortable allowing passengers onboard.
As Citi analyst Jonathan Raviv summed up; "before COVID-19, it was a supply problem where airlines were desperate to take as many airplanes as possible. So we don't see the inventories clearing or production rates normalizing until 2023."
For investors getting involved, even with a major source of uncertainty removed, it’s important that they’re comfortable with the long term play and are willing to ride out any remaining turbulence, for want of a better word. But Boeing is still a multi-billion company and in many ways the face of the US aerospace industry. While this mightn’t be the end of their struggles or even the beginning of the end, it might be the end of the beginning.
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