After the 737 Dilemma, is Boeing Stock a Buy?

Boeing (NYSE:BA) found itself in the spotlight for all the wrong reasons in 2019. Boeing 737 MAX jets were grounded the same day Ethiopian Airlines Flight 302, a Boeing 737 MAX 8 aircraft, crashed and killed all 157 people aboard. Boeing is often regarded as one of the most respected and advanced American industrial and defense stocks, making up the largest percentage of any company in the price-weighted Dow Jones Industrial Average index. Boeing enters the new decade amid scandal and…

underperformance in 2019. Is it possible for long-term investors to look past Boeing’s many current headwinds amid the recent sell-off, or is Boeing stock too opaque to be considered a buy.

737 history and fallout

Looking at the events from the below table, it’s no surprise why Boeing stock underperformed the S&P 500 in 2019. Major airlines such as Southwest Airlines (NYSE:LUV)American Airlines (NASDAQ:AAL), and United Airlines (NASDAQ:UAL) are all struggling to adjust their fleets and flights to the MAX delays.

Date Incident
Jan. 17, 1967 The first Boeing 737 is introduced.
January 2006 Boeing reaches a milestone of 5,000 total 737 planes assembled.
May 22, 2017 Boeing 737 MAX entered into service, as Boeing’s newest line of single-aisle airplanes.
Mar. 2018 Boeing reaches a milestone of 10,000 total 737 planes assembled.
Oct. 29, 2018 Lion Air Flight 710 crashes and kills all on board.
Mar. 10, 2019 Ethiopian Airlines Flight 302 crashes and kills all on board.
Mar. 10, 2019 Boeing 737 MAX planes are grounded. Deliveries were 34 for Southwest Airlines, 24 for American Airlines, and 14 for United Airlines at the time.
Oct. 9, 2019 American Airlines pushes back return to service date of the MAX to Jan. 16, 2020.
Oct. 11, 2019 United pushes MAX flights from Dec. 19, 2019 to Jan. 6, 2020.
Dec. 12, 2019 American Airlines delays commercial service of Boeing 737 MAX fleet until Apr. 7, 2020.
Dec. 16, 2019 Boeing suspends 737 MAX production starting in January 2020 as a result of uncertain FAA and global regulatory authorities’ reservice approval. Production had reached a total of 400 MAX planes, which sit in storage as Boeing waits for approval to sell the planes.
Dec. 17, 2019 Southwest delays scheduling MAX flights until mid-April 2020.
Dec. 20, 2019 United Airlines pushes MAX’s return to Jun. 4, 2020.
Dec. 23, 2019 Boeing fires CEO Dennis Muilenburg, who is replaced by the former chairman, David Calhoun.

For Boeing, the late December news to suspend production and appoint a new CEO was the nail in the coffin for a disastrous 2019. Even though Boeing has severed some goodwill, not to mention some of its reputation, there is little airlines can do about it.

The power of a backlog

Both Boeing and its rival, Airbus (OTC:EADSY), have massive backlogs in plane production. Boeing has a total commercial airplane backlog of 5,488 planes, 4,406 of which are 737 aircraft. As of Sept. 30, 2019, Boeing produced 32 class 737s per month and plans to up its production to 57 class 737s by late 2020. “As of Oct. 31, 2019, Airbus’ backlog was 7,471 jets,” according to Forecast International, noting that “88% were A220 and A320 ceo/neo Family narrowbodies.” Since Boeing and Airbus have essentially a duopoly on the commercial jet market, customers have little alternative but to simply wait in line for planes to be produced, or in the case of the Boeing MAX, for regulatory bodies to reinstate the jet into service.

High demand and customers waiting with cash in hand has historically been one of the main reasons why Boeing stock is attractive. Over the past five years, Boeing has typically traded at a P/E ratio of 15-25, garnering a slightly premium valuation to the market average given its legacy and robust portfolio. Although Boeing delivered hundreds fewer aircraft in 2019 than in 2018, the company was able to grow revenue and operating margins for its defense, space, and security division, as well as its global services division, citing a backlog of $62 billion and $21 billion, respectively, as of the third quarter of 2019.

Separating short term from long term

There’s no denying that Boeing stock is a tough pill to swallow in the near term, especially given fierce competition from Airbus. The 737 MAX has already cost Boeing billions of dollars and will continue to severely affect the company’s profitability until the planes can be sold and flown. That said, Boeing is riding the tailwinds of a global rise in air travel, particularly out of developing countries in Southeast Asia and China. As hard as it is to advocate buying Boeing stock now, it may be even harder to argue how the stock couldn’t do well over the long term.

If Boeing can get 737 MAX planes out of parking lots and into the hands of customers, the stock would…

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