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Boeing: Buy, Sell, or Hold?

0 | By Shah Gilani

The once high-flying Boeing Co. (NYSE:BA) stock and the company’s 737 Max 8 planes have both been grounded.

While the FAA (Federal Aviation Administration) re-certifying the 737 Max to fly again is more a question of when, not if (at least Boeing and its investors hope), the flight of Boeing’s stock is less certain.

Will planes and the stock take off again, or might a long grounding of the company’s mainstay earnings generator flatline the stock or even knock it back to earth?

The two are inextricably intertwined.

Here’s what happened with the Max 8, what investigators and investors are pondering now, and specific price levels for you to answer your own buy, sell, or hold questions…

Follow the Planes

Boeing’s long line-up of 737 commercial aircraft have been earning hundreds of billions of dollars for the world’s largest aerospace company since the first narrow-body 737-200 went into service on April 9, 1967.

Boeing’s now manufacturing its fourth generation 737, the infamous 737 Max 8.

As of December 2018, Boeing’s built and delivered 10,444 737s, including 376 of its new 737 Max 8s.

The Max 8 is the future of Boeing’s single-aisle planes and an earnings juggernaut with 5,012 planes ordered through February 2019.

Flights and earnings grounded.

Since the crash of Lion Air’s 737 Max 8 on October 29, 2018, which killed 189 passengers and crew, and the Indonesian Air crash of another Max 8 on March 10, 2019, which killed 157 passengers and crew and resulted in the global grounding of the new planes, innumerable questions are being asked by investigators, airlines, pilots, and the public.

The questions include: how the 737 Max 8 was approved by Boeing’s board, how it was certified to fly, how was the plane designed, what flight systems it employed, what safety features were offered, how the crew was trained, and questions over company disclosures after the Lion Air crash then the Indonesian Air crash.

Going back to Boeing’s board of directors approving the Max 8, investigators want to know how safety concerns were addressed, and whether Boeing rushed board approval of the newly designed plane to compete with the hot-selling Airbus A320neo, which American Airlines Group Inc. (NasdaqGS:AAL) was on the cusp of buying.

Boeing was also concerned about its largest customer, Southwest Airlines Co. (NYSE:LUV), eyeing the A320neo.

American Airlines ended up ordering the new 737s and had 26 delivered and in service. Southwest ordered, too. By the time of the second 737 Max crash, Southwest had 31 new planes in service.

While American’s plane orders are still pending, Southwest cancelled its remaining orders for another 249 planes.

The new Max 8, approved by Boeing’s board with company chairman and CEO Dennis Muilenburg guiding the process of approval, where critics claim the board assumed “safety was a given,” was FAA certified on March 8, 2017.

Federal investigators, criminal investigators, and FAA are all looking into certification requirements and whether the FAA allowed Boeing to conduct and sign-off on too many certification processes.

Design Issues

Some big changes in the fourth generation 737 included split-tip winglets, airframe modifications, and larger, more efficient CFM International Leap-IB engines which were moved closer to the front of the plane further off its wings.

However, there was a problem with the new engine placement. Moving the engines forward changed the aerodynamics of the plane. The placement causes the plane to “pitch” more, meaning push the plane’s nose up, especially on takeoff.

To counter the upward pitch, which slows a plane down, potentially causing it to stall because of inadequate airspeed, Boeing engineers came up with MCAS (Maneuvering Characteristics Augmentation System).

MCAS is fed air pressure readings from an AoA (angle of attack) sensor that tells the system if airspeed is adequate. If it isn’t, because the plane’s nose is up too much, the MCAS forces the nose down. When a plane’s nose is pointing down, the plane naturally picks up airspeed, causing air to rush over the wings faster, which creates lift.

Although no conclusions have been drawn from ongoing investigations of both crashes, the general understanding from pilot communications, recovered black boxes, and satellite readings of the planes’ flight trajectories, is that both planes noses were forced down by MCAS and pilots didn’t know that MCAS had taken over their controls.

Whether the AoA sensor gave false readings or the MCAS malfunctioned isn’t know for sure – yet.

But, MCAS taking over and pushing noses down for ten seconds, then a two-second pause, and ongoing ten-second, two-second cycles is believed to have caused the crashes shortly after takeoff, precisely as the pilots were pointing the noses of their planes up, obviously required for ascent.

What’s plaguing Boeing, and rightfully so, are…

  • Revelations that Boeing didn’t identify the MCAS in training or adequately in manuals;
  • Boeing sold planes based on pilots already certified on 737s only needing update training, about 56 minutes on an iPad, to be certified on Max 8s,
  • There were no flight control displays showing MCAS in use;
  • Aircraft were sold with cockpit alert systems that weren’t activated because those systems cost more;
  • Companies like American Airlines paid extra for additional controls over MCAS, including override capabilities;
  • And Boeing management hid critical information about MCAS and its potential issues from airlines, pilots, regulators, and the public.

Peter Lemme, a former Boeing engineer and author of the Satcom Guru blog, said after the Ethiopian Air crash, “The issue with MCAS is there is no alert. There is nothing in the flight deck that tells you that MCAS is malfunctioning; see, if there’d been an MCAS light they would have have had to train for it. The minute you put an indication in there, you have to tell the pilot what to do if it goes off.”

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He goes on to say, “In the absence of such an ‘MCAS light,’ the disagree alert would have been the closest thing to a warning the system was about to misfire-that is, if pilots had been told about MCAS in the first place.”

Boeing’s handling of everything having to do with the 737 Max 8 is now under scrutiny.

And I say, rightfully so.

What comes out could potentially cripple the company and deflate the stock that’s held up incredibly well.

On the other hand, the cost to Boeing could only be a few billion dollars, which it can absorb easily.

The jury’s out, so to speak.

But investors want to know what to do with Boeing, whichever way it could go.

Here are the numbers, and how to play Boeing whether you want to buy, sell or hold it.

Buy, Sell, or Hold?

Boeing stock fell on initial news of the Lion Air crash in October 2018. The stock bounced a little and then headed south, but not because of the Lion Air crash; it was because Boeing was getting hit like all stocks in the 2018 October to late December selloff.

After the Fed announced they were putting rate hikes on pause, stocks shot back up off their lows. Boeing was no exception.

After making a 52-week low of $292.47 in December, the stock rocketed to a new high of $446.01 by early March.

Then news of the second crash hit on March 10, 2019.

As of yesterday’s close at $371.60, the stock’s off 16.68% from its highs. That’s only halfway back to the lows the stock made in late December last year.

If you own Boeing, you can hold it here and hope it bounces off support at around $360, if it gets down there.

Otherwise, if the company settles litigation, its planes get recertified, and orders aren’t cancelled, it should go back up and eventually make new highs.

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If you’re thinking about selling Boeing, the $360 level is an important line in the sand. If the stock breaks that solid support, that may be your exit call.

However, because I believe Boeing will eventually overcome all the issues, as many as there are with its handling of the 737 Max 8 and the crashes, and because Boeing and Airbus are the only two mega-players in the industry in the world, and the U.S. is not going to let Boeing crash and burn, Boeing will rise again and its stock will eventually soar again.

If you want to buy Boeing, and I do, I’m looking to the $360 level and lower.

While it’s okay to buy Boeing now if you plan to add to your position if it breaks its $360 support, I think there’s more bad news to come out and I believe the stock will test and probably break $360.

That’s where I’d look to enter a position.

After that, I’ll add to my position at lower levels and hope the stock falls to $300 or lower, so I can average down all the way.

If I get into Boeing at lower levels and the stock consolidates above $360, I’d probably buy more stock as it rises back to its old highs.

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So, that’s how to play Boeing.

Sincerely,

Shah

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