Boeing (BA) earnings have evaporated as 737 Max deliveries are on hold while the coronavirus crushes air travel. But U.S. regulators have approved the 737 Max to return to service. Is Boeing stock a good buy now? Investors should look at the aerospace giant’s fundamentals and the BA stock chart.
Starting on Tuesday, American Airlines (AAL) we will resume 737 Max commercial flights with two flights a day — or one round trip from Miami to New York’s LaGuardia airport — through Jan. 4. After that, American plans to phase in more 737 Max aircraft throughout January, with up to 36 departures from Miami. American will be the first U.S. carrier to put Boeing’s troubled plane back into service. On Dec. 9, Brazil’s Gol Linhas Aereas Inteligentes (GOL) became the first airline to anywhere to restart commercial flights on the Boeing 737 Max.
Meanwhile, Southwest Airlines (LUV) recently said it plans to fly passengers on the 737 Max again in March, up from a prior Q2 timeline. And United Airlines (UAL) will resume 737 Max flights at its Denver and Houston Bush Intercontinental hubs sometime in Q1.
Boeing Stock Fundamental Analysis
Boeing earnings-per-share growth has averaged 0% over the past three years, according to IBD Stock Checkup. In the third quarter, Boeing reported a loss of $1.39 per share. But that beat Wall Street views for a $2.33 per share loss.
Revenue has contracted by 13% on average over the past three years. In Q3, Boeing reported a 29% drop in revenue to $14.14 billion, but that also beat analyst estimates. Commercial aviation revenue fell 56% to $3.6 billion on “lower delivery volume primarily due to Covid-19 impacts as well as 787 quality issues and associated rework.”
Boeing deliveries sank 55% to 28 planes as the 737 Max remained on hold. Operating cash flow saw a net drawdown of $4.82 billion in Q3. That’s more than double from a year ago but improved from a $5.3 billion drawdown in Q2
On Oct. 6, Boeing lowered its 10-year outlook for industrywide aircraft demand by 11% vs. last year to 18,350 commercial jets due to the coronavirus.
Analysts are optimistic on BA stock following the ungrounding of the 737 Max. On Dec. 7, UBS upgraded Boeing to buy from neutral with a 300, double the prior price target.
“Vaccine efficacy of 95% was the catalyzing event for the restart of the aero cycle and history suggests that when the aero cycle works, so does BA,” UBS analysts wrote. “With history as a guide, even after the last few week’s move, BA is following the same path out of the market bottom as it did in ’09, yet unlike ’09 it has only recovered ~70% of its 3mo pre-market bottom or about half prior recoveries.”
Boeing Stock Technical Analysis
BA stock has been on a wild ride due to the Boeing 737 Max fallout and the Covid-19 pandemic.
Shares retook their 50-day and 200-day lines on positive Covid-19 vaccine news, according to MarketSmith chart analysis, and then gapped higher after the Federal Aviation Administration approved the 737 Max’s return to service.
Boeing stock is now slightly below levels last seen since before the coronavirus stock market crash in March. BA stock is back below buy range after breaking out of a cup-type base with a 234.30 buy point within a larger consolidation.
The relative strength line, which tracks BA stock vs. the S&P 500 index, spiked in November to its highest since March, before dipping slightly.
Boeing stock’s CAN SLIM fundamental metrics include a dismal 33 Composite Rating out of a best-possible 99 and a weak 18 EPS rating.
Shares also have an Accumulation/Distribution rating of A, which indicates institutional investors are buying the stock.
Defense, Space Face Negatives
Boeing’s defense and space business is also facing negative news. The KC-46 tanker for the U.S. Air Force is more than two years behind schedule. And it has cost Boeing over $4.7 billion in charges for cost overruns following a $67 million charge in Q3.
Boeing also produces the F/A-18 Super Hornet for the U.S. Navy and foreign militaries. But the Navy wants to cut short the purchase of upgraded Super Hornets. Instead, it wants to shift the money to its own Next Generation Air Dominance platform and other key aviation investments. However, in July Boeing received the first order for what could be a $23 billion contract to build F-15EX fighters for the Air Force.
Boeing announced in September that it submitted a bid with General Atomics and Aerojet Rocketdyne (AJRD) to build the Missile Defense Agency’s Next-Generation Interceptor. That system is designed to protect the U.S. against intercontinental ballistic missile threats. The agency canceled the Redesigned Kill Vehicle program last year over technological issues. Lockheed Martin (LMT) also submitted a bid.
Foreign Sales A Bright Spot
Foreign military sales are looking up for Boeing. The United Arab Emirates will receive Boeing EA-18G Growler electronic warfare planes as part of the U.S. arms deal after normalizing ties with Israel. Improving ties between Israel and other U.S. allies in the Mideast could unlock more deals.
Meanwhile, the company’s space business suffered a setback Dec. 20, 2019, when its Starliner capsule failed to reach the proper orbit for docking with the International Space Station. In February, NASA revealed that a previously undisclosed software issue was discovered during the Starliner’s flight. That problem could have destroyed the space capsule.
The company took a $410 million pretax Q4 2019 charge related to the Starliner space capsule. Boeing has scheduled another uncrewed test flight for March 29, fifteen months after the first test failed to reach the ISS.
A NASA inspector general report also flagged continued setbacks in Boeing’s Space Launch System rocket. As delays continue, NASA’s associate administrator for human spaceflight said in August that the SLS would cost $9.1 billion, or 30% more than previous estimates.
A December hot fire test was postponed after a “wet dress rehearsal,” where propellant is added to the fuel tanks, ended early. The hot fire is the last of eight tests used to ensure that the core stage of the rocket is ready for launch.
Boeing Stock In Survival Mode
To help preserve cash, Boeing suspended its dividend on March 20 and extended its pause on share buybacks until further notice. CEO Dave Calhoun and Board Chairman Larry Kellner will forgo pay for the rest of the year as well.
On April 30, Boeing said it would not ask for government assistance following a $25 billion bond sale and after earlier drawing down a $13.8 billion loan.
In October, sources told Bloomberg that Boeing is considering the sale of a Seattle-area industrial park where the commercial aircraft division’s HQ is located. Executives would move to office space nearby or continue working from home.
The aerospace giant is also considering a stock sale to help pay down debt accrued by the 737 Max grounding.
In December, Ireland’s Ryanair (RYAAY) announced an order for 75 Boeing 737 Max planes, the largest order since the plane was grounded last year. Alaskan Airlines (ALK) followed with an agreement to buy 23 more 737 Max jets, the largest U.S. order for the jet since its grounding.
But the company still faces collapsing demand for new planes. Boeing has seen 737 Max orders shrink by over 1,040 this year as nearly 600 have been removed from the backlog and nearly 450 have been canceled by carriers.
Boeing 737 Max production was halted in January and restarted in May. But as airlines slash flights, Boeing doesn’t expect to increase 737 production to 31 per month until the beginning of 2022, later than a prior estimate of 31 per month in 2021. The 787 production rate will be reduced to five per month in 2021 vs. 10 now and a prior estimate of seven per month by 2022. The company is also consolidating 787 production into one plant in South Carolina in March, earlier than expected.
The 777/777X combined production rate will drop to two per month in 2021, down from a prior view of three, with the 777X’s first delivery targeted for a year later than planned at 2022.
As production slows, CEO Dave Calhoun told employees in October the company plans to further reduce staffing to 130,000 by the end of 2021. That represents a cut of about 19% from the 160,000 level at the start of 2020, and deeper than a prior view for a 10% cut.
Boeing 737 Max
Problems with the Maneuvering Characteristics Augmentation System automated flight-control software contributed to the Ethiopian Air crash in March 2019 as well as the October 2018 Lion Air crash. Combined, the two crashes killed 346 people.
What was expected to be a temporary blip saw the 737 Max grounded for 20 months. The FAA approved the jet’s return to service on Nov. 18. But there are some requirements that carriers need to meet before they can add the 737 Max to their schedules, including software updates and wire separation modifications, as well as pilot training.
The European Union Aviation Safety Agency is ready to lift the grounding in January.
Canadian regulators approved design changes on Dec. 16.
The grounding, suspension of deliveries, and production halt have been costly. Combined with charges booked last year, 737 Max-related costs now approach $20 billion.
Even some of Boeing’s older 737 Next Generation jets that haven’t flown for a while had problems. In July, the FAA issued an emergency airworthiness directive for 2,000 737 NG and Classic aircraft that have been in storage due to a potential engine problem.
Boeing 737 Max, 787 Probes
The Securities and Exchange Commission is reportedly investigating the aerospace giant’s financial disclosures related to the 737 Max’s grounding.
Congress, the Justice Department, FBI and the Transportation Department inspector general’s office also have been looking to see if the Dow Jones giant provided misleading information about the Boeing 737 Max to regulators and customers.
Building on regulators’ probes into the MCAS system, the Justice Department has a new inquiry focused on quality control issues at Boeing’s factories, sources told the Wall Street Journal in April.
Members of the House unloaded a trove of damning new messages at a transportation hearing in October 2019 that laid out warnings from employees before the fatal crashes. And at a House Transportation and Infrastructure Committee hearing in December, a former Boeing employee testified about 737 Max warnings he sent management that said overworked employees were making mistakes.
House Eyes Tougher FAA Oversight
Concluding an 18-month probe in September of this year, the final House Committee on Transportation and Infrastructure’s 245-page report found that “Boeing failed in its design and development of the MAX, and the FAA failed in its oversight of Boeing and its certification of the aircraft.”
The crashes “were the horrific culmination of a series of faulty technical assumptions by Boeing’s engineers, a lack of transparency on the part of Boeing’s management, and grossly insufficient oversight by the FAA — the pernicious result of regulatory capture on the part of the FAA with respect to its responsibilities to perform robust oversight of Boeing and to ensure the safety of the flying public.”
On Dec. 22, Congress passed legislation to stiffen the FAA’s aircraft certification process and prevent the kind of crashes seen with the 737 Max.
Meanwhile, the FAA said in September that it “is investigating manufacturing flaws affecting certain Boeing 787 jetliners” but it hasn’t made a decision on whether it will issue airworthiness directives over manufacturing defects that have come to light.
Is Boeing Stock A Buy?
Boeing 737 Max jets have been ungrounded in the U.S., but most airlines have removed the jet from schedules until early next year. Covid-19 is hitting global air traffic, depressing already weakened demand for widebody planes like the 787. Positive Covid-19 vaccine news helps the stock but it’s unclear when the vaccine will be widely available and how long its protection will last.
After an epic free fall, BA stock rebounded to highs not seen since the pandemic started, pushing it back above its 50-day line and 200-day line. But shares are out of buy range after falling below their latest entry point.
But earnings will likely remain under pressure for a while as the International Air Transport Association, a trade group, doesn’t see air travel rebounding to 2019 levels until 2024.
Bottom line: Boeing stock is not a buy.
Investors looking for stocks to buy can find companies with stronger, more-consistent earnings growth and better stock technicals.
Follow Gillian Rich on Twitter @IBD_GRich for aviation news and more.
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