August 22, 2019

The Boeing 737 MAX Is Still Out of Service. Analysts Are Reading the..

Source: Barron's

The Boeing 737 MAX Is Still Out of Service. Analysts Are Reading the Tea Leaves.

There hasn’t been much new information from Boeing about the grounded 737 MAX jet since the company reported earnings on July 24.

Some on Wall Street are hoping that no news is good news, but the information vacuum has prompted others to seek out obscure data to get a better sense of how the effort to fix the plane is going.

Vertical Research Partners analyst Rob Stallard noted in a research report on Wednesday that the Seattle Times reported Boeing (ticker: BA) is “set to begin hiring a few hundred employees at Moses Lake,” an airport in Washington state, home to MAX jets that have yet to be delivered to buyers. He speculated that Boeing’s reason for the hiring could be to “help prepare [the jets] for their eventual return to service.”

Boeing said the new staff will work on “737 MAX storage and pre-delivery.”

Cowen analyst Cai von Rumohr isn’t troubled by the lack of new information. In a Thursday research report, he wrote that the timeline for bringing the MAX back into service hasn’t changed, essentially because the company hasn’t said otherwise.

The logic of each analyst is a little different, but the result is the same: Wall Street expects the plane to resume carrying passengers by the end of 2019, just like Boeing has said.

The back story. The MAX is the newest variant of Boeing’s popular 737 plane. It has been grounded world-wide since mid-March after two crashes in a matter of months. New flight-control software—called MCAS, short for maneuvering characteristic augmentation system—and angle-of-attack sensors have been implicated in both accidents.

As Boeing’s problems unfolded, some stakeholders have been critical of the company’s communications and even questioned the plane’s design. The company stands by its design decisions and has repeatedly said it sees a manageable path for returning the plane to service.

What’s new. Boeing “has updated MCAS software and is developing software for the flight control microprocessor,” writes von Rumohr in his research report. Boeing is “also working in parallel with airlines and regulators on pilot workload issues.”

That seems to be a reference to one of the collateral issues arising from the MCAS problems. One emergency solution to potential issues with the flight software involves physically cranking a wheel in the cockpit to adjust the plane’s tail, but the Federal Aviation Administration has questioned the strength—or physical workload—that involves.

Von Rumohr also says in his report that airlines are still planning to take delivery of jets in the fourth quarter. That is based, in part, on the fact that airlines haven’t released any new information about plans for their fleets. Again, no news is good news.

He calls Boeing stock one of his “top picks” and has a $460 target for the price. Stallard also rates shares at Buy, with a price target of $400.

Looking ahead. Wall Street, broadly speaking, hasn’t abandoned Boeing stock. About 60% of analysts covering the company rate shares at Buy, 5 percentage points better than the average ratio for stocks in the Dow Jones Industrial Average.

For Boeing investors, when the MAX will return to service is a huge issue, but concern over whether the jet is safe will stay with the company, and the stock, for a while after that. The flying public will want to monitor the plane’s performance.

For aerospace investors, there is the MAX and there is everything else. Boeing shares are down almost 20% since the second MAX crash, involving an Ethiopian Airlines jet, on March 10. That is far worse than the 3% gain of the Dow over the same span.

Aerospace, on the other hand, continues to be one of the best industrial end markets. Suppliers Barron’s tracks are up almost 10% since the Ethiopian Airlines accident.

Airlines with relatively high exposure to the MAX—including Southwest Airlines (LUV) and American Airlines (AAL)—are down, but non-MAX fliers such as Delta Air Lines (DAL) and JetBlue Airways (JBLU) have risen.

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