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The Opportunity In Boeing

Mar. 03, 2020 9:15 AM ETThe Boeing Company (BA)117 Comments

Summary

  • Somewhat counterintuitive, Boeing could pull the cart during a market recovery.
  • Sell-off in late February was market wide due to COVID-19 and not related to Boeing 737 MAX crisis.
  • Current share price levels fit the Boeing 737 MAX crisis cost impact, but this is driven by market fears of COVID-19 and not the Boeing 737 MAX costs.
  • Market pushed Boeing down in the right range for the wrong reason, creating an opportunity.
  • Risk of lasting impact of COVID-19 remains.
  • Looking for a helping hand in the market? Members of The Aerospace Forum get exclusive ideas and guidance to navigate any climate. Get started today »

Boeing (NYSE:BA) shares have been tanking into the close to February as I discussed in an earlier report. However, somewhat counterintuitive, this could as well provide an opportunity for investors who don’t feel uncomfortable taking a bit more risk. In this report, I explain why this is an opportunity but also why it's a high-risk opportunity.

Boeing 777X COVID-19

Source: CNN

Share drop unrelated to the Boeing 737 MAX

The first thing to note is that while shares dropped to a range that I deem acceptable based on cost projections of the Boeing 737 MAX crisis, the share drop in no way is related to the Boeing 737 MAX problems. In my view, there has been a lack of progress as well as a lack of updates from Boeing regarding the return-to-service of the MAX, but nothing changed on the Boeing 737 MAX recovery that triggered the sell-off. Kicking in an open door: The sell-off was triggered by the spreading of COVID-19. To date, extremely little of the Boeing 737 MAX crisis costs has been priced in, and looking at things for the past year, I wouldn’t say the selling volumes have been such that the Boeing 737 MAX crisis costs will be fully factored in the share price on the condition that the MAX returns to service and is not written off. I don’t think a write-off of the MAX is reasonable at this stage, at least not from my understanding of the design. A problem is that there's a huge disjoint between the public perception of the Boeing 737 MAX design and what is actually happening from an engineering point of view, which also contributes to the disjoint in MAX related share price development and consequences for Boeing and public views on the path forward for Boeing and the company’s share prices. The news about the Boeing 737 MAX hasn’t been pretty for a year now, but

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This article was written by

Dhierin Bechai profile picture
15.14K Followers

Dhierin-Perkash Bechai is an aerospace, defense and airline analyst.

Dhierin runs the investing group The Aerospace Forum, whose goal is to discover investment opportunities in the aerospace, defense and airline industry. With a background in aerospace engineering, he provides analysis of a complex industry with significant growth prospects, and offers context to developments as they occur, describing how they might affect investment theses. His investing ideas are driven by data informed analysis. The investing group also provides direct access to data analytics monitors. Learn more.

Analyst’s Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (117)

Fcfrag profile picture
You say "fear", some say "common sense".
There's likely value out there, but not in BA.
Dhierin Bechai profile picture
@Fcfrag it took almost a year to generate common sense? ;)
Fcfrag profile picture
I've been afeared of the repercussions of the MAX crashes since the 2nd one happened!
BA just dropped below 200.
FrenchTrading profile picture
@Dhierin Bechai Yep, indeed. Now 140-160 is a good level (support range). Although price action may punch through it with the current sink rate. I anticipate a dead cat bounce before BA starts the climb. For now, it's more like "terrain!,. terrain!" Let's see if Captain Market can pull up in a timely manner. BA is just in the middle of some serious wind shear. Rough time, I tell you.
E
Boeing Co
NYSE: BA
262.19 USD −20.89 (7.38%)
Mar. 5, 3:42 p.m. EST
r
MAX will fly and Corona will fade by June then watch record demand set in! Warm weather can do amazing things.
William Loh profile picture
Hi DB... Just wondering (for years) why so many analysts talk at such length about the commercial side and leave out the military/space/maintenance/parts side(s). Let's not forget McDonnell Douglas and all the rest so quickly. With the MAX $$$ going missing, it is about 55% of the revenue, up from about 40% before.

Boeing has shamelessly bought their own shares big-time while messing up brand value by getting their cash-cow airplane wrong, killing 347 people in the process. Still hard to believe. They needed 3 more lines of code, but the non-pilot, non-software MBAs were fully in the way:
IF (airspeed > 300kts) then Stop
IF (altitude < 10000ft) then Stop
IF (Stab Trim is nose down) then Stop

Still surprised at your "view" of MCAS and saying it was all about feel and not anti-stall at all. Sadly, it did behave like a stick-pusher and nothing says anti-stall more than that.

Longs: You should read the well-done JATR report...and the Annual Report/10Q/etc. from Boeing.
Z
I could have coded that in one line.....just sayin'.

Glad you aren't writing their code.
William Loh profile picture
They wish now that I had done...and not only them.
Z
Only problem is that when you write code that takes three instructions/tests, instead of a single test, you are wasting valuable time.

Just sayin'. I don't think you have ever written a line of code. But you are good at pontificating business requirements in retrospect.

My suspicion is that the engineers had a scenario in place to govern this, but because of the pricing and options for the planes, that service or functionality was not available to the planes that crashed.

So please, spare me your brilliance.
OverTheHorizon profile picture
Disaster is the flip side of opportunity. Does anyone really think we will return to the expansion of international air travel? More planes being parked than bought.
C
Very good article. I agree the sell off is largely triggered by the virus situation. Also it might be a mix as the one year anniversary of the Max Desaster brings the magnitude back to center stage.

The max issue was never priced in. Strange. Boeing was able to keep the perception of an imminent return esp under Dennis. Most people did not comprehend it was all propaganda and nonsense. Dennis knew always the max would not return in 2019, of course.

Now, all is up in the air. The max is off the schedules. People have moved on. Demand is declining at least shorter term. Airlines have made other plans.

It is an opportunity as the author says. It might if you assume an optimum scenario. I am not in that camp and we remain cautiously short as we are since May.
w
What about the dividend ? Cash flow says look out.
Vandooman profile picture
The market will recover quickly as people realize the virus is not going to devastate humanity. We are learning more about who is at risk of death and it is not the working age population. Much to do but not a game changer.
F
BA is falling behind. APPL raced ahead, +10 or +3.6% to take the top spot in the DJIA. BA on Tuesday gave back it's Monday gains and today is basically flat. Currently AAPL is +$18 to BA.

More importantly with the results of Super Tuesday, UNH has taken a moonshot, +27 or +10.4%. This rocketed UNH past BA to take second place in the DJIA.

HD is closing in, +9 or +4.1% on BA and now less then $45 below BA.

With BA losing it's prominence in the DJIA has it lost it's title as the go to stock to move the DJIA? What effect will this have on the share price? Will the markets now start pricing in it's current troubles?
F
Wow, on a huge up day with all 30 DJIA stocks green, BA is the smallest percentage mover in the DJIA at only .89%. Next smallest percentage was XOM at 2.18%. With UNH being the top mover at 10.74% it managed to rocket past BA to take second place in the DJIA.

Dollar wise, only 5 stocks in the DJIA were up less then BA. Even that mistake that got put in the DJIA, WBA (currently below it's entry price) was up more than BA. 14 of 30 DJIA stocks were up over $5.

Immediately after the 4pm cash close the Dow futures dropped back 100 points. Currently down about 150. After hours BA is down about .50.
Dhierin Bechai profile picture
That opportunity I saw... it doesn't seem to materialize so far.
F
Was most peculiar how BA was trading yesterday. DJIA gapped up and never traded in the red, but BA spent more time in the red than in the green. And it really only closed green because it got pulled up with everything else.

Here at the open it's leading the DJIA down, currently BA -12. Next closest is APPL -6, UNH -6 and GS -6. So two days in a row BA is way under performing the market. Does somebody know something we don't?
walter scott profile picture
I wonder if anyone actually goes out and surveys a significant percentage of sellers and asks them why they sold. Seems to me it's all speculation on the part of the press and somewhat self serving in some cases.

AgileDave profile picture
For many it's fear or greed. For some it's just discipline. Outing the emotional sellers would spoil the game.
walter scott profile picture
Yes, I do understand that, but sometimes I think there are traders to watch the news for scary events and then jump in and try to stampede the herd while setting themselves up to take advantage of the stampede. It only takes a short-lived stampede and a small manufactured dip to make a lot of money.
AgileDave profile picture
You say that like it's a bad thing... Yes, there are many forces at play in financial markets. And there are many who blindly follow the herd, chasing "hot tips" and rumors. The markets are composed of millions of individuals, bringing all the strengths and weaknesses, inspired brilliance and agonizing defeats you would expect from any group of human animals. As with stampedes in the wild, many will blindly follow the herd, but many learn to ask why, and step aside when there's not a good answer.
A year or so ago I held a modest position in BA, and of course I'm glad to have sold. I admire the accomplishments and history of this great enterprise, and I thought it a good and safe way to profit from an expanding space program. BA, I expect, will receive big government contracts as space program is revitalized. If we do not take the moon then the Chinese will.

But I do not admire BA's current problems with suppliers delivering defective parts like improperly machined panels where screw taps don't line up and two big girls gotta press hard to hold parts in place so they can be bolted down. And after two crashes I don't care if those planes are grounded. BA is risky. I'd feel like I was at a craps table just waiting for snake eyes.
c
Crashing in a 737 is no longer people’s main concern, catching a virus on a plane is. I would like to have some estimates of BA order losses due to reduced travel resulting in earnings loss. To say BA is a buy on today’s and this articles math is a guess and guessing is a poor investment strategy.
Dhierin Bechai profile picture
It's unlikely anybody will be able to give you those estimates. There is extremely little math involved in this report... on purpose. This is a technical view on possible contributions Boeing might have on market recovery after the recent sell off. For math, you might check over 900 of my previous reports.
S
I'd actually choose a 737 MAX over any other plane to fly on right now. If someone did manage to force me onto a coronavirus infection tube (aka...an aircraft) I'd rather it just crash quickly than suffer a lingering illness:)
G
@Dhierin Bechai While I agree BA is a great contrarian long pick right now, what you seem to forget is that airline companies around the world will take massive hits. And being a capital intensive and cash flow critical business, they will inevitably cut current and future orders until the ship is righted. And who knows when that will be. Long long term BA buy
Aviation Systems International profile picture
How embarrassing...US just approved sale of KC-46 tankers to Israel...

Now the Israelis will see what pieces of junk Boeing and the US produce...

Lets see if they have the same tolerance for FOD and a non-working aircraft as the USAF...

simply embarrassing...
f
Dont BS yourself...the Israelis will fix it...and then tell us how.
C
Purchased 500 shares today.
E
@Coney Island Nick

278.10 USD −2.51 (0.89%)
Mar. 4, 10:06 a.m. EST
f
Good to see ya back, Nick.

Spirit re-starts 737 max fuselage production THIS month.
Audit72 profile picture
BA is "estimating" how many $$ they will have to refund to plane buyers (it grows with each month of delay), how much financial support to provide to their supply chain and then the "profit" per plane when they are finally delivered - the billions in development costs are amortized from the balance sheet over the production life of the plane. Reduce the estimated number of delivered planes and the profit per plane drops. A lot of large moving estimates that BA is probably reluctant to be conservative with in their financials. Too many large estimates for me at this time.
P
Thanks, @Audit72 . You write : 'the billions in development costs are amortized from the balance sheet over the production life of the plane'.

Well, ... Boeing is going to have to ask itself a few fundamental questions. The Purist Accountants are not happy with that sort of aspect, of Boeing's own special brand of 'Bloc-cum-Programme Accounting'.

It is NOT because one practises that sort of accounting that one can simply neglect a critical review of Balance Sheet items (notably assets), with the approach of a 'Coherence Check', just to parameter a few common-sense items, in terms of Unexpired Value (e. g. 'What is the real unexpired value of all these biliions of development costs, now being carried forward as an asset, relative to an aircraft that is no longer bringing in orders ?').

That usually brings some nasty surprises and a sharp wake-up call.

In broad terms, Best Practice (see GAAP, IAS & IFRS) dictates that one treat all Development costs as expenses written off over the accounting year i.e. as annual period costs, save for the Fixed Assets (& some patents) , to be capitalised and legitimately amortised over an appropriately determined 'productive life-period'.

We know that Boeing will never be allowed to fail.

But what is so special about Boeing that it can even be allowed to get away with being above common-sense ?
Audit72 profile picture
Aircraft development costs apply to 10-20 years of production as in the venerable 747. Expensing multiples of billions for the Max would have destroyed the profits of the development years with no offsetting sales. Aircraft product development costs for specific models are kept on the balance sheet due to their future value. Think of the patent exception you mentioned. The concept is the same.
Audit72 profile picture
Google Boeing and program accounting. BA is one of few operations smoothing out the profit per unit of production over long periods. It is GAAP under certain circumstances. I believe the SEC is interested now that BA has a significant problem.
M
"To me it seems that Boeing is no longer the darling of the market.".... And you have 10,000 followers?
Dhierin Bechai profile picture
I just looked up the sentence and man.... you might quote a bit better the next time. This is the sentence: "To me it seems that while Boeing no longer is the market darling, it has some elements in it which could possibly make it suitable for supporting the market in recovering. " You forgot the "while" in the sentence which totally changes the meaning. @N93143, since you placed a like on the comment please be aware that some comments are not what they seem.

This has to be the finest piece of selective quoting that I have seen in
my journey to almost 10,000 followers. I really think the way you practiced that comment is in bad taste.
P
Yes, @Dhierin Bechai, ... great ! Now you see (and I strongly approve ; and clearly, I'm NOT alone) why others and I rear up at, inter alia, this sort of selective reading, taking out of context, and even tinkering with the prose !
c
People were banging the drum to buy BA at $325. I'll stay away. Somehow, BA lost its way, IMHO. It's not only the aircraft business that has faltered, the space business has, too. As tragic as the Corona virus is, 'this too, shall pass' does apply; yet, airlines always get screwed with this type of event ('no travel'), and I do think reduced passenger traffic and losses by airlines may well bleed through to aircraft manufactures and reduced orders; at least, in the very short run.

In any case, I think BA has a cultural issue to surmount. I hope the new CEO and top management know the score, and put quality back into the process.

Best of luck to all.
Dhierin Bechai profile picture
People have been saying Boeing is buy all the way since it fell from $446... so always make your own investment decisions. Boeing has a lot to fix, so investing in it (even though I marked the opportunity here) is not straightforward.
AgileDave profile picture
Investors don't make money based on what the company did before, but what it is likely to do in the future. The stock was driven down by people who believe they won't fix their problems and return to profits. They're not likely to remain correct.
c
It's crazy to think BA won't return to profitability.

It's crazy to think that with 737 Max, space program issues, Corona, and management issues that BA shares weren't due to take a dive.

When will the shares bottom? I have no clue. Personally, though, I don't think the market is done sorting through BA's issues.

Best of luck.
User 509088 profile picture
Like a tbill right now, but it is tapped into the main vein of the whole damn thing. A couple more rinses with tesla and I’ll be taking some of this co.
F
Nobody will DISagree
j
Cover-19 is a long term problem with no short term solution. BA and much of the market is entering a secular bear market. Come back next year at the same time and you will be able to buy BA at much lower levels. An era of "Economic Inactivity" doesn't bode well for many stocks I'm afraid.
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