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What are the headwinds facing Boeing’s share price?

Boeing’s [BA] share price might have gained some altitude since its 52-week low of $89 during the March sell-off but, year-to-date, it has stalled.

For the year to 3 September, Boeing’s share price is down 49.37%.

A brief rally in June, which saw Boeing’s share price climb nearly 60% in the first week of the month didn’t amount to much, and since then Boeing’s share price has remained resolutely under $200.

What’s going on with the aircraft manufacturer, and will Boeing’s share price take off again anytime soon?

 

 

Boeing’s cash burn

Boeing has been struggling with its fleet of 737 Max aircraft, which were taken out of service in March 2019, following two deadly crashes in the space of five months.

The plane maker had expected to restart deliveries of the troubled jet last December, but this was pushed back until later in the year. The company fell behind schedule on meeting the requirements of the Federal Aviation Authority, a situation that was further exacerbated by the coronavirus pandemic. 

To navigate the crisis and the associated drop in air travel, Boeing took out a $25bn bond offering in April, which it said would strengthen its position in the face of an expected full-year cash burn of $20bn. The bond also meant that the company didn’t have to take coronavirus aid from the US government.

Cash burn for Q2 2020 ending 30 June was $5.6bn, up 19% on the $4.7bn posted in the second quarter of last year. The delay in bringing the 737 Max jets back into service is largely responsible for this cash usage. 

$5.6billion

Valuation of Boeing's cash burn in Q2 - a 19% YoY rise

  

Back in December, Boeing had announced that it would be halting production of 737 Max jets in January, but wouldn’t be laying off any of its employees during the production freeze. Analysts were sceptical and argued that the plane maker would still burn through up to $1bn a month.

From an investor’s perspective, the only possible silver lining is that the grounding of commercial carriers as a result of COVID-19 travel restrictions and quarantine rules means Boeing isn’t the only company to have been hit by a reduced summer travel season. 

 

Further trouble with the 737 Max

In June, investors took some solace in the news that Dan Loeb, CEO and CIO of Third Point, had bought Boeing’s debt — having listed the company as one of May’s winners. Boeing’s share price jumped nearly 60% in the first week of June.

The recovery was short-lived, though. By the end of the month, Boeing’s share price had fallen 20%, losing nearly all the gains it made earlier in June. This came after Boeing’s key supplier, Spirit Aerosystems [SPR], revealed it had received a letter from the plane maker requesting that it pause additional work on four 737 Max shipsets and production of a further 16 shipsets.

Spirit said this would lead to a reduction in the 125 units it had agreed to ship to Boeing by the end of the year — an order already down from the previously agreed 216 shipsets. This slowdown will have an inevitable knock-on effect on the speed at which Boeing can deliver its 737 Max jets.

Rob Stallard, analyst at Vertical Research Partners, has described Boeing’s aim for a production rate of 31 737 Max jets a month by early 2022 as “too optimistic”, according to Barron’s.

Stallard also noted that the Q2 2020 earnings were “a plane wreck”, adding: “Almost every single metric in Boeing’s [profit and loss] was worse than we had expected”.

“We continue to think that the plethora of downside risks is not fully reflected in Boeing’s current share price,” Stallard wrote in a note to clients.

“Almost every single metric in Boeing’s [profit and loss] was worse than we had expected. We continue to think that the plethora of downside risks is not fully reflected in Boeing’s current share price” - Rob Stallard, analyst at Vertical Research Partners

 

A potential near-term nosedive ahead?

In planning for the possibility that the company hasn’t reached its bottom yet, and that there will be worse quarters to come, Boeing has recently announced further job cuts on top of the 16,000 – 10% of its total global workforce – that it had already announced in April.

Ronald Epstein, senior equity analyst at Bank of America, has argued that coming up with measures to reduce costs and ways to generate cash flow will probably not be enough for Boeing’s share price to avoid further fallout. 

In a note to clients, Epstein wrote that Boeing should be focusing all of its efforts on “ensuring safety through a return to engineering excellence and investing for the future of commercial aerospace”. 

Epstein maintained a Neutral rating for the stock but lowered his price target from $195 to $175. 

Looking ahead, once Boeing’s 737 Max jets have returned to the skies it will remain to be seen how reluctant people will be to fly on them again. On top of this, air travel isn’t set to return to pre-pandemic levels for at least a couple of years. 

Despite potential further turmoil ahead for Boeing’s share price, once things do return to normal, the manufacturer has every chance of soaring again in the long-term.

Feeling for Boeing’s share price among analysts is mixed. According to MarketBeat, of the 27 Wall Street ratings currently available, five are a Sell, 14 a Hold and eight a Buy.

 

Market Cap$95.262bn
EPS (TTM)-5.03
Operating Margin (TTM)-5.01%
Quarterly Revenue Growth (YoY)-25%

Boeing share price vitals, Yahoo Finance, 4 September 2020

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