Will 737 MAX woes keep Boeing’s share price grounded?

Boeing [BA] has had a difficult year so far, as the company has been plagued by controversy surrounding the faulty 737 MAX as news of the model’s grounding grounded filled headlines after two deadly crashes. With its Q3 earnings due for release on 23 October before the US opening bell, investors will be keen to scrutinise the numbers to assess the extent to which Boeing has been affected by the setbacks. 

With a strong likelihood that Boeing will again be reporting fewer orders, its Q3 earnings are bound to reveal some worrying developments since the previous quarter. There is speculation that because of the problems caused by the grounding of the 737 MAX, Boeing might have to carry out major job cuts, according to Reuters. How might investors respond to the quarterly figures?

Bracing for more falls

Since the crash of Ethiopian Airlines’ 737 MAX in March, Boeing’s market capitalisation has shrunk by over 11%, or $26bn, according to Market Realist. Before that, the company’s share price had gained by over 40% in the year to 1 March. Since then, though, the stock has fallen by close to 23% to $344 as of the end of last week from its year-to-date high of $446.01.

By comparison, rival Airbus’s [AIR] share price was up by 5.6% and the iShares US Aerospace & Defense ETF [ITA] was 2.6% higher over the same period.

Last quarter, Boeing reported its worst-ever loss of $2.9bn on revenue of $15.75bn and a core loss per share of $5.82, compared with revenue of $24.25bn and EPS of $3.33 in Q2 2018.

For the third quarter, analysts expect adjusted EPS of $2.04 and revenue of $19.5bn, which would be down by 43% and nearly 23%, respectively, from a year earlier, MarketWatch reported.

If the Q3 report delivers a worrying set of numbers, the company might look to diversify its sources of income, as Boeing has been relying on the 737 MAX to be one of its strongest products. The model accounts for 80% of Boeing’s commercial jet deliveries and also contributes a generous 30% to operating profits.

Boeing share price vitals, Yahoo Finance, 22 October 2019

Why is there a delay for the 737 MAX?

Getting the 737 MAX back in service, therefore, will be crucial for Boeing to start making a recovery. Southwest Airlines, whose pilots are suing Boeing for lost income over the grounding of the 737 MAX, predicts that the model will start flying again in February. Meanwhile, Boeing has said it is “working towards return to service in the fourth quarter” for the 737 MAX, according to Reuters.

However, media reports that surfaced late last week about internal company messages related to alleged issues with the plane's anti-stall system before the aircraft entered service could complicate Boeing’s efforts.

Meanwhile, these fresh concerns in the US Congress and among investors about how regulators might have been unintentionally misled about the 737 MAX’s safety do not augur well for the company’s earnings and share price.

The reports have led Credit Suisse and UBS to lower their ratings for the stock. The latter stated: “We see increasing risk that the [US] Federal Aviation Administration won't follow through with a certification flight in November and lift the emergency grounding order in December," as it downgraded Boeing stock to "neutral" from "buy", Reuters reported.

“We see increasing risk that the [US] Federal Aviation Administration won't follow through with a certification flight in November and lift the emergency grounding order in December” - UBS analyst Myles Walton

The share price is likely to remain volatile throughout the remainder of 2019, as issues with the 737 MAX – and how Boeing responds and plans to rectify them – remain unresolved.