Boeing Shares Will Fly Again

Boeing Shares Will Fly Again

Software has been eating the world for a long time. Indigestion was inevitable. It came in 2019.

The most spectacular software fail of the year happened at Boeing (BA). Glitches caused two of its jetliners to crash. Last week, the Chicago company fired Dennis Muilenburg, its chief executive.

The Boeing board is trying to encourage investors to relax.

It’s a good strategy …

It has been nine months since a cutting-edge Boeing 737 Max jetliner fell from the sky. The crash killed 157 passengers aboard Ethiopian Airlines Flight 302. It was the second fatal crash in four months. The popular jetliner has been grounded since.

The Max is an aerospace engineering oddity.

Boeing 737 Max. Credit:

The fourth-generation 737 seats up to 230 passengers, a 27% bump over the classic. Yet, larger CFM turbofan engines positioned ahead of the wing and other changes make the aircraft 14% more fuel-efficient.

Unfortunately, the rejiggered configuration brought unintended consequences. The nose of Max aircraft often lifted unexpectedly on takeoffs. In the worst case, planes simply stalled.

To compensate, Boeing engineers implemented anti-stall software systems to automatically lift the tail flags. The fix was supposed to push the nose lower. The failure of these systems is at the heart of investigations, lawsuits and the current downdraft in Boeing shares.

It’s also a very un-Boeing story.

Related post: Boeing troubles put harsh focus on software automation

Boeing launched the 707, the first jet-powered airliner, in 1954. A dozen years later, it set standards again when it put four jet engines in the 747, the first jumbo jetliner. The first 777, launched in 1994, has been even more revolutionary.

The 209-foot long, 506,000-pound aircraft was the first airliner designed solely on a computer. Its powerful twin turbofan engines are the largest and most fuel-efficient ever built. And its widebody frame can carry up to 440 passengers 8,270 miles without refueling.

Traditionally, carriers relied on three- and four-engine aircraft. They were more practical and considered safer. Moreover, the Federal Aviation Authority barred two-engine airplanes from long distance flights.

The logic was sound. If one engine failed, having another two or three was a good thing — especially when the route covered large bodies of water.

Then, Boeing convinced the FAA to rate the 777 safe for three hours’ flying time on only one engine.

Overnight, three-engine airliners became obsolete.

Boeing shares are currently trading at $326.93,
or 36.4% off their 52-week high of $446.01.

They could not match the carrying capacity of the 747, nor could they compete with the fuel efficiency of the 777.

The versatility of the 777 changed the way airlines operate. Fuel efficiency, coupled with the ability to carry lots of paying passengers, was an instant hit with airline executives.

The 777, introduced almost three decades ago, is the most successful aircraft in aviation history.

New commercial orders reached 912 units in 2017, bringing the total backlog to 5,800. And a revamped 777x, with a wider body and even more efficient turbofan engines, is now in development.

The 737 Max stands in stark contrast.

Development was reflexive from the beginning. American Airlines (AAL) announced in 2011 an order for 260 narrow-body jets from Airbus (EADSY), Boeing’s archrival.

That decision busted Boeing’s monopoly over American. Executives scrambled to re-engine the 737 with a software fix for the compromised electronics.

In hindsight, Boeing managers should have continued with their 777 platform strategy.

Stakeholders have certainly paid a high price for that lack of foresight. According to a New York Times report, the grounding of 737 Max aircraft has already cost Boeing $8 billion, and a 20% haircut in the stock price. Quartz puts the cost above $9 billion.

What investors miss is perspective …

737 Max is a software issue. It can and will be resolved.

Engineers are writing code and implementing new systems. During an October conference call with analysts, Boeing executives mentioned its safety team had been in touch with more than 250 operators, financiers and regulators to get 737s back in the air.

During the third quarter, Max delays led to a 41% decline in commercial aircraft revenue, to $8.2 billion. However, the order backlog for all commercial planes remains at 5,500, representing $387 billion in future value.

Demand for Boeing’s 777 and 787 commercial jet programs is ramping up nicely as airlines around the world replace aging aircraft.

This is a supercycle … one you should consider investing in.

Other Boeing businesses are hitting on all cylinders, too.

  • Boeing Defense, Space & Security had $7 billion in sales and booked 4% billion in new orders. During the next 10 years Boeing executives see $2.5 trillion global opportunity.
  • Boeing Global Services, its global parts operations, grew 14% year-over-year, to $4.7 billion during the quarter. The outlook for the next decade is robust. The total addressable market is $3.1 trillion.

Software is playing a bigger role in all aspects of commerce. It’s eating old business models. The trend is likely to accelerate, even with notable debacles like the 737 Max.

Periods of indigestion are inevitable. The best remedy is relaxation.

Boeing shares trade at 18.8x forward earnings and only 2x sales. The market cap has shrunk to $188.9 billion.

Given the pipeline and the likelihood software issues with the 737 Max will be resolved sooner than later, investors should consider buying shares into the current weakness.

Best wishes,
Jon D. Markman

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