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Why Bad News May be Good News for Boeing

Posted on Tuesday, January 21st, 2020 by Chris Markoch

Why Bad News May be Good News for Boeing

There is a saying that bad news comes in threes. Such is the case with Boeing (NYSE:BA) stock as investors digest three pieces of negative news that is putting the stock in the red in midday trading on January 21.

The bad news is just the latest in what has been nearly a year of bad headlines for Boeing. The first negative headline came when reports began to surface that Boeing is seeking out loans to help buffer the company’s cash position as they continue to deal with the fallout from the crashes of its 737 Air Max jets.

As first reported by CNBC, Boeing has already secured “at least $6 billion” from some of the nation’s largest banks: Citigroup (NYSE:C), Bank of America (NYSE:BAC) Merrill Lynch, Wells Fargo (NYSE:WFC), and JPMorgan Chase (NYSE:JPM).

The news of the loans was not completely unexpected. And while the company remains in a solid cash position, the loans seem to be a prudent move that will give the company flexibility as they continue to weather the uncertainty surrounding the 737 Air Max shutdown.

Boeing has officially shut down production of the 737 Max

On January 20, the company confirmed that it is canceling the production of the beleaguered aircraft. Like the news of the company seeking loans, this news was not altogether unexpected. The company had been continuing to build the 737 Max, but at much lower levels. However, the company announced in December that it would be shutting down production, although it had not set a date for the shutdown.

Boeing confirms another software problem with the 737 Max

The third headline was more alarming. Boeing is now confirming that they have discovered new software issues during a technical review of the 737 Max. This is creating further speculation on when the airliner will be given permission to resume production of the 737 Max.

According to information released by Boeing, the issue concerns software that verifies if monitors that track key systems of the aircraft are operating properly. In a statement, Boeing said, “We are making necessary updates and working with the FAA on submission of this change, and keeping our customers and suppliers informed.”

There’s no way to spin these headlines as good news for a stock that has seen far too much bad news. However, if there is a silver lining, it is simply this. The company is fully disclosing the problem. While this may not seem like that big of a deal, Boeing has been rightfully criticized for not handling the crisis effectively.

In October of 2019, analysts soured on Boeing when news first broke that the company was being too optimistic with previous estimates of when the 737 Max would be back in service. This was also around the time when analysts were first becoming aware that the company was not being forthcoming with regulators.

Why This Time May be Different

As evidence of that, the company is also being embarrassed by the release of internal documents that are shedding new light on how much employees knew about the problems with pilot training for the 737 Max. Furthermore, the company had initially tried to conceal that news from regulators.

The documents reference Boeing employees saying the aircraft was “designed by clowns, who in turn are supervised by monkeys,” in what appears to be a reference to colleagues and management.

But while this is not flattering news, it says something that the company is being forthcoming about the problems with the 737 Max. And while some investors will say that should be table stakes for companies facing a crisis, it hasn’t been the norm. That's one reason (among many) that Boeing ousted its former CEO Dennis Muilenburg.

If analysts believe that the company is now prepared to work closely and transparently with regulators, this news can turn out to be the time when the stock began to find new life.

 What’s next for Boeing stock?

In the short term, there’s not much to like about Boeing stock. But that was going to be true regardless of this latest news. Airbus (OTCMKTS:EADSY) is announcing “unprecedented demand” for its A320 series jet. The A320 is the competitor to the grounded 737 Max. Airbus is creating additional production capacity to accommodate the increased demand. Last year, Airbus delivered 786 commercial planes which was far more than the 380 Boeing produced.

In addition, Airbus has a net order for 768 new planes where Boeing has 87. This is significant because these manufacturers are not paid in full until the airplanes are delivered.

However, aside from Airbus, Boeing exists in an industry without a tremendous amount of competition. This gives the company room to get this right. The larger issue with the 737 Max will take some time to resolve. But restoring investor trust is a difficult, but important, step. Despite the news being bad, the fact that the company is getting out in front of it, may be an important first step in that occurring.

 

 

Companies Mentioned in This Article

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Citigroup (C)$78.79flatN/A9.80Buy$89.86
JPMorgan Chase & Co. (JPM)$137.46flatN/A12.82Hold$135.88
Wells Fargo & Co (WFC)$48.22flatN/A12.00Hold$49.98

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