The aerospace industry suffered another wave of turbulence on Monday (16 December), following the announcement that Boeing [BA] would suspend production of its troubled 737 MAX jetliner.
As a result, Boeing’s share price fell 4.29% to a 12-month low of $327 on Monday. It also sent the iShares US Aerospace and Defense ETF [ITA], which tracks the industry, down 1.19% with it.
The aerospace manufacturer had planned to recommence production in January, however, the decision by the Federal Aviation Administration (FAA) and global regulatory authorities to extend its certification to 2020 led to uncertainty about the timing and conditions of its return to service.
Ground to a halt
“Throughout the grounding of the 737 MAX [since March], Boeing has continued to build new airplanes and there are now approximately 400 airplanes in storage,” the company said. As of 30 November, Boeing had a backlog of 4,545 orders, The Wall Street Journal notes.
More information about how the suspension of production of Boeing’s best-selling plane will impact its financials is expected to be included in its Q4 earnings release in late January. The expectation from Jefferies analyst Sheila Kahyaoglu is that there will be a temporary suspension in production to halve the $4.4bn in cash that Boeing has been burning through each quarter by making and storing jets, according to The Wall Street Journal.
While the company has set aside $3.6bn to cover higher production costs and $6.1bn for compensation, the suspension will still likely hike up costs over time due to the scarcity of fixed expenses over fewer planes.
Amount Boeing set aside to cover production costs
“We expect Boeing to support suppliers, which comprise of ~65% of the 737 cost base, in order to preserve labour and production capabilities. For now, we assume ~50% of supply chain costs hang around, resulting in monthly cash burn that is still solidly above $1bn,” JPMorgan analyst Seth Seifman wrote in a note to clients. The firm reduced its price target from $400 to $370 but remains overweight on the stock.
The impact on the industry
As well as hitting Boeing, the fallout has extended to its global suppliers. Shares in Britain’s Senior [SNR.L], which manufacturers parts for the MAX, were down more than 11% at Tuesday’s close, while shares in Paris-based aerospace business Safran [SAF.PA] and GE [GE] dropped 1.5% and 0.6% respectively.
Boeing’s top supplier Spirit AeroSystems Holdings [SPR] also closed down 2.8% Tuesday. Tom Gentile, CEO of Spirit, had previously told the Financial Times that the Max programme made up around 50% of the company’s revenue.
“We expect Spirit Aero will see a rate reduction from its current 52 per month [which Spirit had stated it would maintain in April], but the exact level has not yet been determined, and we believe negotiations with Boeing will likely take into 2020 to finalize,” Canaccord Genuity analyst Ken Herbert wrote in a note, according to Reuters.
“It would be hard to have any other single company stop the production of a single product and have it hit the economy as hard as this would,” Luke Tilley, chief economist at investment-management firm Wilmington Trust, told the Wall Street Journal.
“It would be hard to have any other single company stop the production of a single product and have it hit the economy as hard as this would” - Wilmington Trust chief economist Luke Tilley
Indeed, the grounding of the MAX has dented growth in the US economy throughout the year, with federal figures revealing that exports and orders for durable goods have suffered. Tilley estimates that stopping production of the MAX for just one quarter would cut 0.3 of a percentage point from quarterly annualised GDP growth.
A buying opportunity
While Boeing’s stock is up 2.8% YTD (as of 16 December), the share price is range-bound between support and resistance, according to technical analysis by Bret Kenwell.
He points out that news headlines have been the driving factor for its share price movements and indicates a range of support between $320 and $330 that has buoyed the stock. If this support holds, he predicts that the stock could rebound.
|PE ratio (TTM)||49.92|
|Quarterly Revenue Growth (YoY)||-20.50%|
Boeing share price vitals, Yahoo Finance, 18 December 2019
“The first upside targets are its now-declining major moving averages. Currently, they are clustered between $352 and $359. Above that and range resistance near $375 is in play. If range support begins to fail, the August lows at $317.70 will be on watch. Below that and $300 will be on the table, along with the 52-week low of $292.47,” Kenwell writes in The Street.
Boeing has a consensus hold rating among 23 analysts on CNN, with a median 12-month forecast of $384 out of 20 analysts, representing a 17.4% upside from current levels.