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Key Takeaways for Boeing Stock:
- The near-calamitous door plug incident on a 737 MAX shook shareholders and sent Boeing stock BA into a nosedive. We anticipate it will take until mid-2025 to stabilize deliveries.
- Production issues, despite significant engineering and quality control expenses, illustrate how challenging it is to build commercial aircraft. Problems can be very costly but also contribute to high barriers to entry and a wide moat.
- We believe Boeing will be able to elevate the 737 into a margin-accretive position by 2027 and we don't think investors should expect incremental failures on the 737 MAX after the intense scrutiny it’s received.
Andrew Willis: Have you ever seen the prices for airplane parts? How about sixty dollars for a seatbelt buckle or seven thousand dollars for a coffee maker? Anything that flies has to go through numerous safety and quality checks which help push up the price – and they involve expensive labour to install.
So when things go wrong, they go wrong in expensive ways. The event involving a door falling off of a Boeing 737 MAX jet has put the expansion of production on pause. The U.S. Federal Aviation Administration has also increased the number of inspectors at Boeing, which is a good thing for safety – but we do see some production turbulence.
Equity analyst Nicolas Owens says that Boeing will now need to wait a little longer for certification of its other MAX models and that a stabilization of 737 deliveries will take until mid-2025. As a result, we’re lowering our fair value estimate for Boeing stock from 232 U.S. dollars to 219. In recent years, this reworking of the 737 has amounted to $6.8 billion in deferred production and tooling costs, but we do see that dissipating by 2026 and the 737s even contributing to margins by 2027. And while that may seem like a ways off, keep in mind that Boeing is still way ahead of its competitors – except for Airbus, of course.
The Difficulty of Boeing’s Business is a Double-Edged Sword
Boeing stock investors should keep in mind that the product complexity that challenges the company also helps keep competition at bay. Bombardier, for example, with its business jet and engineering expertise, has had trouble breaking into the wider commercial jet market. And the most serious new entrant today, China-based Comac, hasn’t been able to ramp up production to more than 3 or 4 aircraft a month. In 2024, we still expect Boeing to deliver 127 MAX 8s to China and India, and 22 units for U.S. customers – and the company has a backlog that goes on for years.
As Boeing works through issues, demand should grow, especially from emerging markets, for its new aircraft with improved efficiency, comfort and preferably safety for the company and passengers alike.
For Morningstar, I’m Andrew Willis.
Boeing Bulls Say
- Boeing has a large backlog that covers several years of production for the most popular aircraft, which gives us confidence in aggregate demand for aerospace products.
- Boeing is well positioned to benefit from emerging-market growth in revenue passenger kilometers and a robust developed-market replacement cycle over the next two decades.
- We expect that commercial airframe manufacturing will remain a duopoly for most of the world for the foreseeable future. We think customers will not have any meaningful options other than continuing to rely on incumbent aircraft suppliers.
Boeing Bears Say
- Boeing's reputation for engineering prowess may have taken a permanent hit since repeated manufacturing flaws in 737 MAX jets have hampered Boeing's assembly pace and disrupted airlines' and passengers' schedules.
- Long term, changed consumer behaviour, especially among business travelers, could be unfavorable for aviation.
- As recent history has proved, aircraft development is notoriously susceptible to development delays, hiccups, and cost overruns.
The author or authors do not own shares in any securities mentioned in this article.
