Uncertainty for Boeing Stock

Boeing stock has experienced significant volatility in the past week following the 737 MAX 9 accident. However, it remains uncertain whether the shares have been adequately punished or if there are further challenges ahead.

Initially, this year held promise for Boeing and its stock. Projections indicated a notable improvement in various aspects. Wall Street expected commercial jet deliveries to reach almost 700, a substantial increase from the approximately 530 deliveries in 2023. Additionally, free cash flow was anticipated to nearly double, surpassing $6 billion.

Unfortunately, the MAX 9 accident and subsequent grounding disrupted these expectations. After an emergency door plug blew out of Alaska Air Flight 1282 on January 5th, Boeing shares dropped $31.30 per share, approximately 13%. In the same period, the S&P 500 saw a 2% increase.

Due to the significant drop in share price, approximately $19 billion in market capitalization has been wiped out, considering the outstanding 605 million shares. The lingering question for investors remains: Is this decline sufficient?

One silver lining for investors is that the impact of the MAX 9 incident is not as extensive as the global grounding of the MAX jets, which commenced in March 2019 after two tragic crashes within five months. Neither does it compare to the repercussions of COVID-19, which devastated air travel demand.

Currently, there are approximately 200 MAX 9 jets in operation globally out of a total of 1,400 MAX jets. Once the MAX 9 is ungrounded, it is expected to represent only about 30 of the projected 700 deliveries in line with Wall Street estimates. As a result, Boeing is still anticipated to fare better in 2024 than it did in 2023.

However, it appears that the grounding might not end as swiftly as initially anticipated on Wall Street. Although inspections and necessary corrections for the MAX 9 door plugs could have allowed the planes to resume flying, the Federal Aviation Administration (FAA) is adopting a highly cautious approach towards its return to service.

Analysts estimate that Boeing is incurring a daily cost of $2 million to $3 million due to the grounding. If the planes remain grounded for 50 to 60 days, this would account for roughly 2% of the projected 2024 free cash flow.

While the financial impact is significant, the damage to Boeing's reputation is likely even more substantial. Unfortunately, quantifying this impact remains challenging for investors.

Boeing's stock valuation has been a cause for concern in recent times due to the MAX safety issues. RBC analyst, Ken Herbert, suggests that if the stock falls back to the $170s or $180s range, it would be trading at a low-teens multiple on free cash flow. This would put Boeing's valuation at around 18 times the estimated 2024 free cash flow and 12 times the estimated 2025 free cash flow. In comparison, aerospace peers trade for closer to 20 times forward-year cash flow.

While Herbert acknowledges that it's uncertain whether the stock will reach that level, he endeavors to assist investors in identifying a potential bottom. He rates the shares as a Buy and has set a $300 price target for them.

On the other hand, some argue that Boeing's stock may already be approaching that level. Frank Cappelleri, founder of CappThesis and a market technician, points out a few technical signs that suggest the stock could be reaching a short-term oversold state. These signs include the stock's proximity to its 200-day moving average of $214, the retracement of almost two-thirds of the rally from October lows, and being close to oversold levels based on 14-day relative strength calculations.

Considering the potential upside, the average analyst target price for Boeing's shares is $280, which would represent a rise of approximately $60. Conversely, if the stock were to fall to $175, it would entail an additional loss of $40. This risk-reward ratio of $60 to $40 provides investors with a sense of the potential gains and losses.

Furthermore, it's worth noting that air travel continues to be safe for passengers. Global accident rates in 2022 were approximately 35% lower compared to a decade ago, bringing reassurance to both Boeing shareholders and the flying public alike.

It is crucial to emphasize that the incident that occurred should never have happened and must never be repeated, as stated by the FAA in a Jan. 11 statement. This sentiment is unanimous, with Boeing also agreeing that such incidents should be avoided at all costs.