Indonesia’s Boeing 737 Max Rebuke Could Send BA Stock Into a Tailspin

September 23, 2019 16:30 UTC

Boeing (BA) stock has taken off over the past month or so as strong institutional demand for the company’s shares – in light of the U.S.-China trade war – has given it a shot in the arm.

Boeing stock’s rise has rubbed off positively on the Dow Jones Industrial Average (DJIA) as the aerospace giant is the largest constituent of the index with 9.55% weightage. But don’t be surprised to see the stock lose altitude this week as the company’s ill-fated 737 Max jet is about to get another rap from regulators.

Boeing stock has made a recovery in the past month, but Indonesia’s 737 Max report could knock the wind out of its sails. | Chart: Yahoo! Finance

The Boeing 737 Max is in the Dock

Nearly a year ago, a Boeing 737 Max aircraft operated by low-cost Indonesian carrier Lion Air crashed in the sea off Jakarta, claiming 189 lives. This incident, and the subsequent March 2019 crash of an Ethiopian Airlines flight that claimed another 157 lives, was enough for regulators to ground the 737 Max.

The plane was grounded and orders for the Boeing aircraft dried up as carriers and passengers were apprehensive of reposing their trust in the 737 Max. It goes without saying that Boeing’s bottom line took a massive dent thanks to the failure of the once-popular aircraft to get off the ground.

This is why reports that the National Transportation Safety Committee – the Indonesian government agency responsible for investigating safety – will blame Boeing’s aircraft for the mishap could take a toll on the stock and the Dow this week.

According to a Wall Street Journal report that cites people familiar with the matter, the Indonesian agency is going to blame the design of the 737 Max jet for the crash. The agency has also found other reasons such as lapses in oversight, pilot errors, and maintenance issues that led to the fatal crash.

With Indonesia becoming the first government to formally lay blame with the Boeing 737 Max, it could have a negative bearing on the aircraft’s ability to get off the ground.

Why This Could Be Bad News for the Stock

Boeing has been forced to cut down on the production of the 737 Max after customers started canceling orders. As it turns out, inventories have been piling up despite the company’s move to cut monthly production to 42 units in April from 52 units a month before the aircraft was grounded.

The aerospace company is using employee parking lots to store its undelivered jets. So there are a lot of 737 Max aircraft that Boeing is struggling to move and its inventory costs could jump to $12 billion this month according to Bloomberg.

So don’t be surprised if Boeing decides to halt the production of the 737 Max so that it can save itself from incurring inventory costs. And if global regulators don’t reach a consensus on whether to restore the jet to service or not, the aircraft might never get back into the sky.

That’s an option that Wall Street doesn’t seem to be considering yet. But if the Boeing 737 Max does not fly again, Barron’s estimates that Boeing stock could plunge to $300 a share, a 20% crash from the current levels. Such a crash would be triggered by a slowdown in Boeing’s earnings and cash flow growth.

A compilation of analyst estimates by Yahoo! Finance indicates that Boeing’s earnings are expected to jump five-fold in 2020 to $22.44 per share as compared to an estimated $4.02 per share in 2019. But if there is no favorable resolution to the 737 Max’s future in light of Indonesia’s report, Boeing’s ability to grow its earnings next year will be in doubt, bringing an end to the stock’s recent rally.

This article was edited by Sam Bourgi.

Last modified: September 23, 2019 15:49 UTC

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