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Margaret Moran
Margaret Moran
Articles (316) 

Boeing: Nearing Agency Approval for the 737 Max

Could recovery be on the horizon for this beaten-down stock?

September 30, 2020 | About:

This past couple of years, Boeing Co. (NYSE:BA) has been undergoing what is perhaps the most tumultuous period in its century-long history.

Following the deadly crashes of two of its 737 Max planes in 2018 and 2019, the model was grounded around the world and orders were cancelled until the issues could be fixed. The stock price dropped, but it didn't go well and truly down the drain until the Covid-19 crisis struck, hitting the aircraft industry hard and making Boeing's new boatload of debt from the 737 Max scandal even more of a lodestone. Year to date, the stock has dropped 49% to trade around $164.34 on Sept. 30.

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However, Boeing may finally be seeing the light at the end of the tunnel in terms of its many issues. Under the leadership of new CEO David Calhoun, who took the helm in January, the company has been aiming for increased transparency, more stringent testing processes and a better culture in order to regain its former quality and the trust of customers. Analysts are predicting a turnaround to occur in the travel industry some time in early 2021, which should roughly coincide with the return of the 737 Max to the skies, as the plane is nearing agency approval.

737 Max issues

Lion Air Flight 610 took off from Jakarta, Indonesia on Oct. 29, 2018 and crashed 12 minutes later, killing all 189 passengers and crew members. A few months later, Ethiopian Airlines Flight 302 took off from Addis Ababa, Ethiopia on March 10, 2019 and crashed only six minutes after takeoff, killing all 157 people on board.

Though software issues were identified as the main direct cause of the crashes, the issues surrounding the 737 Max did not begin with software. Instead, they began when Boeing began rushing to beat its largest competitor, Netherlands-based Airbus (XPAR:AIR), after the company announced in 2010 that it planned to make a new, more fuel-efficient and cost-effective plane. The rush to be the first in terms of new technology is nothing out of the ordinary, but when hundreds of lives are at stake with each flight, trying to push a product through the pipeline too quickly for the sake of profits can have disastrous results.

The technology issue identified by the flight log of the crashed flight from Indonesia was that a faulty sensor reported that the plane was stalling, even though it wasn't. The sensor-reading trigger is an automated feature called the Maneuvering Characteristics Augmentation System, or MCAS, which then pointed the aircraft's nose down so that it could gain more speed and fly safely. The similar angle of attack when the Ethiopian flight crashed indicates that it likely faced the same issue.

This issue reveals not just a sensor problem, but a deeply ingrained issue with the way the automated systems of the plane interact with the human pilots. As Calhoun said in a statement, "The process around which that fatal assumption was made, around what a pilot would do in a moment in time in a certain circumstance, based on a very long historical record, that process should have had more light shined on it."

FAA test flight

After nearly a year working to fix the Max's issues, the Federal Aviation Administration reported to the U.S. Congress last week that it and three other leading aviation regulators elsewhere in the world had completed assessments of new pilot-training requirements for the Max earlier that week. Following the assessments, the FAA is confident that it is near the final approvals to return the plane to service.

FAA Chief Steve Dickson, who has flown for both the military and Delta Air Lines (DAL), took the controls of a 737 Max during a test flight on Wednesday. The plane was updated with Boeing's proposed fixes for the deadly issues. An FAA spokesman and some Boeing pilots were also on the flight. The test flight included repeated changes in direction, speed and altitude.

In the press conference before the test flight, Dickson reiterated that this test flight was not part of the official approval process. However, the FAA chief pledged last year that he would not sign off on the aircraft's return to service until he had flown the revamped version himself and felt comfortable putting his family on it.

"It was important to me to experience firsthand the training and the handling of the aircraft so I can have the most complete understanding possible as we move forward with this process," Dickson said. "I like what I saw [during the flight]. It's been a constructive week. That doesn't mean I don't have some debrief items for the Boeing team and FAA team. I have some observations that I'm going to share with them. That's going to be incorporated into the process going forward."

Travel industry recovery

If the 737 Max is re-approved for service some time toward the end of 2020 or the beginning of 2021, it could coincide with recovery in the travel sector. Analysts from Wall Street, Morningstar and many other sources seem to generally believe people will begin travelling in larger numbers again in 2021, though they do not expect recovery to 2019 levels until around 2023.

The Covid-19 pandemic is still very much an issue, and no one can really predict when it is going to stop being a major threat to public health. The travel sector's recovery will likely be just as lengthy and complicated.

However, once investors start seeing a recovery in earnings, bullish sentiment on travel stocks is likely to increase, even if the numbers aren't what they used to be.

Valuation

This brings us to Boeing's valuation. Assuming the comapny can successfully repair both the 737 Max and its reputation, and that it doesn't lose too much of its market share permanently to competitors thanks to the whole fiasco, the stock is trading at a very attractive valuation today.

The GuruFocus Value chart marks the stock as a possible value trap:

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While the low price may be enticing – it hasn't been in this low of a range since 2017 - the investment risk associated with the stock is quite high. If the 737 Max is not re-approved, or (even worse) if it is approved again but continues to experience technical issues, not only would the stock price go down the drain again, the company itself might also become a fallen giant, never again to attain its previous operating capacity.

Boeing could also underperform expectations due to factors such as mounting debt (which more than doubled between 2017 and 2019 alone) and the harm done to consumer confidence in the company from the Max's issues. Its position in the U.S. market will likely prove sticky, but international markets might decide to stick with competitors like Airbus. Partially due to the 737 Max crisis, Airbus's A320 is sold out all the way through 2025.

All things considered, Boeing today looks to be a high-risk, high-reward situation, though there is still a possibility of mediocre returns.

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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