Boeing (BA): Will the stock take off again?

The crash of any airliner is indeed a tragedy. The most recent crash of Ethiopian Airlines’ Boeing 737-Max 8, so close to a similar model that crashed in less than 6-months, is particularly saddening – one that prompts our thoughts to go out to the families and loved ones of those that perished in the accident. Investors are now left to figure out what the future has in store for portfolios that hold Boeing (BA).

Here’s one way of looking at how things might play out.

Crashing share price

BA closed at $422.54 on Friday 8th March 2019 – just two days before the fatal crash of its 737 Max 8 airliner. The crash on Sunday 10th March left investors wondering what to do with their positions.

Daily_Price_Table

Pre-market, as this piece is being written, the stock is trading at $370.00 even – down by $52.45 and still falling. That’s a decline of over 12% within a span of 11 days! And the slide in share price is accompanied by unprecedented increas3 in trading volume too, adding conviction to the price decline.

A look at the company’s market cap will bring home the stark reality of what investors should expect in the coming months.

BA_MarketCap_Chart

Over the last 11 trading days have wiped off over $28.5 billion dollars from the company’s market cap. That’s a spectacular decline by any measure. And as the world waits for the outcome of the ongoing investigation with bated breath, the rumors, speculations, and innuendo aren’t doing the share price much good.

BA_Price_Chart

There had been some hope of recovery, largely on the expectation that not many countries will ground or bar the 737 Max 8 from flying their airspace. The price also got a bit of a lift out of Lufthansa’s announcement of the purchase of several other (not 737) Boeing models. However, as the US authorities grounded the 737 MAX, overall sentiment for a recovery have waned significantly.

What’s at stake

The 737 MAX is a very profitable program of income stream for BA and accounts for anywhere between 30%-40% of revenue. It (737 MAX) is the fastest-selling aircraft in Boeing’s history (2017 Annual Report page 3), with the first MAX 8 only just being delivered for service as recently as May 2017 (page 27).

Boeing-737-Max-8

Recent unofficial reports indicate that the two 737 MAX 8 crashes could have similar profiles. If for some reason, one of BA’s most popular and newest aircraft is found to have major structural and design flaws, that wouldn’t bode too well for the company’s future – nor for portfolios holding its stock.

As of February 2019, there were 5012 MAX orders received, of which 376 have been delivered. As we write this piece, all in-service MAX-8s have been (temporarily) grounded out of an “abundance of caution” more than a certainty of a defect. However, airlines that had that airplane in service, and there are nearly 80 of them, will experience revenue losses and service disruptions.

If, as is widely expected, many of those carriers ask (or sue!) Boeing to compensate them for these hardships, that could amount to millions of dollars – depending on how long the flight ban is in effect. And that, once again, could hurt portfolios holding BA.

The most challenging thing is the amount of time it might take to determine the root cause and fix it. The longer it takes (months – or even years!), the more risk it poses to BAs long-term profitability.

And then there’s the human impact – on the families and friends that have lost loved ones in the twin 737 MAX 8 crashes. If it is determined that the genesis of both crashes is similar, or that Boeing knew of a defect and didn’t address it immediately following the earlier accident, that could lead relatives of all 346 victims to sue for compensation. And that, again, might spell disaster for the stocks’ price.

Some runway for maneuvering

But this tragic story doesn’t necessarily spell all doom and gloom for investors. There’s still hope that Boeing will manage to fly through these storm clouds and come out in clear skies on the other side:

· The company has (so far!) handled the crisis professionally, treating everyone impacted by them with dignity and respect

· There are reports that BA engineers may already be working on potential fixes that could forestall any major delays to carriers resuming MAX-8 flights

· Large aircraft like the 737 take years of lead-time to develop and deliver (737-MAX was conceptualized in 2011 and delivered in 2017). That means existing customers (with 4630 orders in the pipeline) will most likely not easily dump Boeing for a competitor (like Airbus)

Given these less negative undertones to this tragedy, it is very likely that the company will recover from their current woes and continue to add value to shareholder’s portfolios. So, what can shareholders realistically expect?

By the numbers

Analysis of just a selective set of data from AirSafe.Com and PlaneCrashInfo.Com reveals some interesting numbers that investors might do well to consider when making a buy, sell or hold decision on Boeing stock.

Based on just a selective number of incidents involving various models of 737 aircraft since 1972, over 3,200 passengers and crew have perished in Boeing aircraft crashes

  • December 8, 1972: This is when the first incident analyzed occurred, with 43 reported fatalities. The stock price closed at 0.84 cents on that date. By Jan 11, 1973, the stock closed at 0.88 cents
  • September 3, 1989 (Sunday): The share price closed at $18.79 two days prior to a crash involving 12 fatalities. By Oct 6, 1989, the stock price closed at $19.58
  • April 20, 2012: An incident occurred this date with 127 fatalities when the stock was trading at $73.55. By May 2, 2012, the stock price closed at $77.26
  • August 14, Aug 23, Sep 5, Oct 22, 2005: These four incidents lead to a total of 379 fatalities. On Aug 12 (Friday prior to the first crash noted here) the stock closed at $66.54. On July 25, 2006, the stock closed at $83.75

This graphic shows stock price movement based on data from 38 incidents compiled from the two previously named sources. The price movement has been plotted on price charts ranging from a few days prior to an incident, to several weeks/months following the incident.

There is an analytical opinion out there that the twin crashes of 18-2019, within a span of just 6 months, are a serious anomaly in crash patterns that investors can’t hide from. But that might be slightly misleading. 2005 saw four fatal crashes, all of them within a span of 3 months – two occurring less than 10-days apart in the same month – Aug 2005. The following year, 2006, saw two fatal crashes in two successive months.

The prognosis

Investors must decide for themselves on what they should do with their Boeing holdings. But take a look at the data too, so you can make an informed decision.

On December 8, 1972, the first date of an incident shown in these graphics, the stock closed at 0.84 cents. Intra-day on March 14, 2019 (4 days following the March 10, 2019 crash shown in these charts), the stock is trading at $377.14.

Boeing’s fundamentals are strong, and the company is considered one of corporate America’s crown jewels. The company employs thousands of highly skilled and experienced technicians, designers and business people. It is highly likely that investors may see the company suffer a loss of reputation and declining stock prices – but that should be a short-term phenomenon.

If company engineers are able to successfully roll out the promised “fix” shortly, then there’s a good chance that recovery will follow soon. However, in the long-term, and based on the data reviewed here, BA will survive and once again be cleared for takeoff!

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