Shares of Boeing (BA) are under pressure on Tuesday after Barclays analyst David Strauss downgraded the stock to Equal Weight as he sees the recovery of 737 Max production taking longer than expected. Citing a survey of over 1,700 fliers, the analyst added that a large portion of fliers are likely to avoid 737 Max flights for an extended period beyond when the grounding is lifted.
LONGER RECOVERY: In a research note to investors on Tuesday, Barclays' Strauss downgraded Boeing to Equal Weight from Overweight and lowered his price target on the shares to $367 from $417. The analyst said he expects the recovery of 737 Max production to take longer than expected and his 2019-2020 earnings and free cash flow estimates are well below consensus as a result. His forecast reflects that Max deliveries resume in the fourth quarter, with Boeing accumulating about 300 aircraft in storage while production only gradually increases to 57 per month by early 2021. While most investors he speaks with believe there will be minimal apprehension to fly the Max upon re-entry into service and airlines that have large Max fleets have echoed this sentiment, he sees risk that it could be worse this time than following past incidents given social media and fliers' ability to know the aircraft type in advance of booking. Overall, Strauss thinks the production rate recovery will be slower to come through than anticipated as he believes the airlines are unlikely to take aircraft as quickly as prior to the grounding.
SURVEY SAYS: In order to gauge perception of the 737 MAX, Barclay's Strauss and his team surveyed 1,756 fliers in North America and Europe, reflecting a broad mix of age groups, income levels and frequency of airline travel. The survey indicated a large portion of fliers are likely to avoid 737 Max for an extended period beyond when the grounding is lifted. Further, the analyst found that while 39% of respondents said they would fly on the Max within a few months of its re-entry into service, a higher 44% would wait a year or more. Meanwhile, if given the choice between a 737 Max and another aircraft type on otherwise identical flights, 52% would choose the other aircraft type while the rest were mostly undecided, he added.
ALERT DID NOT MEET REQUIREMENTS: Boeing said in a statement over the weekend that, "In 2017, within several months after beginning 737 Max deliveries, engineers at Boeing identified that the 737 Max display system software did not correctly meet the AOA Disagree alert requirements. The software delivered to Boeing linked the AOA Disagree alert to the AOA indicator, which is an optional feature on the Max and the NG. Accordingly, the software activated the AOA Disagree alert only if an airline opted for the AOA indicator. When the discrepancy between the requirements and the software was identified, Boeing followed its standard process for determining the appropriate resolution of such issues. That review, which involved multiple company subject matter experts, determined that the absence of the AOA Disagree alert did not adversely impact airplane safety or operation. Accordingly, the review concluded, the existing functionality was acceptable until the alert and the indicator could be delinked in the next planned display system software update. Senior company leadership was not involved in the review and first became aware of this issue in the aftermath of the Lion Air accident. […] In December 2018, Boeing convened a Safety Review Board to consider again whether the absence of the AOA Disagree alert from certain 737 MAX flight displays presented a safety issue. That SRB confirmed Boeing's prior conclusion that it did not. Boeing shared this conclusion and the supporting SRB analysis with the FAA. Boeing is issuing a display system software update, to implement the AOA Disagree alert as a standard, standalone feature before the MAX returns to service."
PRICE ACTION: In morning trading, shares of Boeing have dropped about 2% to $364.25.