JPMorgan sees 'no reason to take the under' when estimating a return to service for the 737 MAX
After Boeing (BA) said that it now estimates a mid-2020 return for its grounded 737 MAX jet, Vertical Research said it is "throwing in the towel" on the stock, telling investors it could get worse for the company before it gets better. Meanwhile, JPMorgan said Boeing's announcement is a "negative" in that it points to a base case that is a few months beyond expectations.
BOEING PUSHES OUT MAX RETURN DATE AGAIN: Boeing issued a statement on Tuesday on the 737 MAX return to service. The company said it is informing suppliers and customers that it is currently estimating that the ungrounding of the 737 MAX will begin during mid-2020, several months later than the company previously expected. Boeing said in its statement that "This updated estimate is informed by our experience to date with the certification process. It is subject to our ongoing attempts to address known schedule risks and further developments that may arise in connection with the certification process. It also accounts for the rigorous scrutiny that regulatory authorities are rightly applying at every step of their review of the 737 MAX's flight control system and the Joint Operations Evaluation Board process which determines pilot training requirements."
Boeing further reiterated that returning the MAX safely to service is its "number one priority, and we are confident that will happen."
Regulators grounded the MAX planes in 2019 after two fatal crashes killed a total of 346 people. A flight-control system aboard the planes was implicated in both of the crashes.
VERTICAL 'THROWING IN THE TOWEL': Vertical Research analyst Robert Stallard downgraded Boeing to Hold from Buy with a price target of $294, down from $388, acknowledging that the downgrade is "belated." The analyst said he is "throwing in the towel" as another push out in the estimated return to service of the MAX is "bad enough" but the ramifications "have yet to reverberate." The analyst said "it could get worse before it gets better" for Boeing, contending that customer compensation costs are likely to be higher than previously thought and it "now looks guaranteed" that Boeing's upcoming results will be "an absolute disaster." He added that a return to service for the MAX in the third quarter of 2020 would also mean more than six months of the 737 production line being dormant, and said firing up the line and the supply chain post-stoppage is likely to be more challenging than anticipated.
In addition to the issues with the MAX, Stallard said there are a number of other issues that Boeing still needs to address. For example, he said that the MAX is an "inferior" product versus Airbus' (EADSY) A320 NEO, the 787 rate is arguably too high, and the 777X faces development and demand challenges. He added that a "toxic" corporate culture has arguably been the root cause of many of the problems that Boeing management now has to deal with. While he thinks a new CEO could help, he also thinks changing a company’s culture is a very tough, long-term process.
Following another three month push out of the return to service of the MAX, Stallard said his free cash flow forecast has been cut by an aggregate of $16B over the 2019-2022 period.
PUSHED OUT TIMELINE A NEGATIVE: Meanwhile, JPMorgan analyst Seth Seifman told investors in a research note of his own that Boeing's announcement of its new best estimate that regulators may allow the MAX to re-enter service in mid-2020 is a negative, in that it points to a base case that is a few months beyond expectations. The analyst said he believes the new timeline for ungrounding includes both FAA certification of Boeing's software updates as well as approval of pilot training requirements. He added that "there may be some buffer too, but experience suggests no reason to take the under on timing." The analyst's "best guess" is that revenue service slips three months in a base case.
Seifman kept an Overweight rating on Boeing shares with a $370 price target. He noted that the announcement provides more context for Boeing's earnings on January 28, where he is hoping for insight on plans to manage the balance sheet this year. Overall, Seifman said he expects Boeing will work through near-term issues with the 737 MAX, and said the company remains in a good position to capitalize on its "robust" backlogs.
OTHERS AT RISK: BofA analyst Andrew Obin said Tuesday's announcement from Boeing increases the likelihood that its 737 MAX production pause extends through the first half of 2020, which presents a risk to General Electric (GE), Honeywell (HON), Parker-Hannifin (PH), Eaton (ETN), and Rexnord (RXN), which all have exposure to the MAX program. While he believes investors may look through 737 MAX issues in the first half, he also thinks investors may underestimate the impact on secondary and tertiary suppliers and broader U.S. industrial firms, Obin stated.
PRICE ACTION: In morning trading, shares of Boeing fell about 1% to $310.51.
Keywords: 737 MAX, grounding, return to service, downgrade, analyst, commentary