Boeing shares will be restored in the long term, but it is not yet time to buy on weakness

Boeing (NYSE :), & # 39; the world's largest aircraft maker, is recovering from one of the worst crises in its history, caused by two fatal crashes involving the most promising aircraft, 737 Max. This narrow-body aircraft was the safest bet of the space giant to grow in a tightly fought battle with its competitors.

But after the two crashes of the past five months that led to a worldwide landing of the aircraft and the initiation of many investigations against Boeing's security practices, this growth rhythm has come to a halt. Boeing's long-term investors are trying to figure out the extent of the damage to the company's reputation and its financial prospects.

The stakes are too high for both Boeing and the American economy. The 737, which first entered service in the late 1960s, is the best-selling model of the aerospace industry and Boeing & # 39; s top earner. The updated Max version was so successful that more than 5,000 orders worth more than $ 600 billion were added, including aircraft that have already been delivered, according to data from Bloomberg.

Deposits of 737 MAX orders boosted Boeing's revenue last year for more than $ 100 billion. That drove the market capitalization of the Chicago-based company more than $ 250 billion before the Ethiopian airline crash on March 10, the second after the October fatal incident that also involved Max 737, carried out by Lion Air in Indonesia

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The 737 Max is Boeing & # 39; s largest contributor to product income and pre-interest and tax revenue (EBIT), according to Goldman Sachs estimates, with a potential to account for 45% of Boeing's EBIT in the coming five years

China's risk from Boeing

China, which accounted for about 20% of Max deliveries worldwide in January, is considering excluding the Max jet from a list of US export products it would purchase as part of a trade agreement with the US, according to a report from Bloomberg. If this step becomes a reality, followed by other countries and airlines, it can damage Boeing's cash flows and lighten its growth plan for years.

Although analysts are divided over the short and long term impact that Boeing will experience as a result of the Max crisis, it is not hard to see that 2019 will be a tough year for Boeing and that most will be consumed by claims management. According to Credit Suisse, a combination of negative developments could damage Boeing's cash flows this year by $ 3.7 billion, or about a quarter of the bank's cash flow forecast.

Analysts at Edward Jones, who are bringing down Boeing's stock, said in a note that the two accidents could lead to additional costs and some delay in Max orders, thereby reducing Boeing's income.

"In the longer term, we believe that the prospects are offset by the backlog of other aircraft (such as the 787), recent victories of the defense program and the expansion of the service sector … We believe that equities are being properly appreciated for long-term investors, "said Edward Jones analyst Jeff Windau in a note to investors.

Boeing's shares, which increased by 33% in 2019 before the outbreak of 10 March, have since suffered a loss of around 11%, reflecting investors' nervousness and uncertainty about the potential income impact of these two incidents . The shares have risen by 1% in the past two sessions and close at $ 376.16 yesterday.

Boeing Weekly Price Chart

In our opinion, Boeing cannot in any way escape the short-term damage to his company in the form of canceled orders, production interruptions and the costs associated with solving software problems. This human tragedy hit Boeing at a time when the supply was not cheap. The company saw its market capitalization rise from less than $ 100 billion in 2016 to $ 211 billion today. His stock still trades at around 21 times the gain after the recent pullback. This valuation corresponds to the average forward P / E ratio of the past five years.

In the future, we expect Boeing's shares to remain under pressure as more information becomes available about the size of the company's financial costs, as well as the possible negative outcome of the many regulatory probes that are currently being used. performed

Bottom Line

There is no doubt that the Boeing shares will recover from this crisis in the long term. Airlines have no choice but to choose one from the duopoly of the Boeing-Airbus aircraft maker. That is why Boeing's share is still rising more than 18% this year, demonstrating Wall Street & # 39; s strong confidence in the company's long-term competitive advantage. This bearish spell will not end soon for Boeing. The time to take advantage of the weakness of the share has not yet come.

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