Friday, June 12, 2020

Boeing Stock Plummets on Bad News About the 737 MAX Jet

The on-again, off-again Boeing 737 MAX drama continues. A key supplier was asked to halt work related to the grounded plane, potentially putting the existing timeline for its reintroduction to service, as well as total deliveries expected in 2020 and 2021, at risk.

The revelation is hitting both stocks. Boeing shares are down almost 10% in Thursday trading. Stock in Spirit AeroSystems (SPR)—the key supplier—is down more than 13%.

Spirit said on Wednesday evening that it received a letter from Boeing on June 4 directing the company to “pause additional work on four 737 MAX shipsets and avoid starting production on 16 737 MAX shipsets to be delivered in 2020.”

Spirit makes a lot of the fuselage of a 737 MAX jet, and the plane is its largest aircraft program. A shipset refers to all the work done on one MAX jet by the supplier.

The MAX—Boeing’s newest single-aisle airplane—has been grounded world-wide since mid-March 2019 following two deadly crashes inside of five months. Boeing has been working with global aviation regulators on fixes and hopes to start delivering the plane again to customers by the end of the summer.

The Spirit news might put that timeline at risk. Boeing only recently started producing MAX jets again after a long pause, having halted output after its inventory of finished MAX jets rose to about 450.

“Based on the information in the letter, subsequent correspondence from Boeing dated June 9, 2020, and Spirit’s discussions with Boeing regarding 2020 737 MAX production, Spirit believes there will be a reduction to Spirit’s previously disclosed 2020 737 MAX production plan of 125 shipsets,” adds the news release.

Less production in 2020 could signal a few things to investors. For starters, it could mean the MAX timeline is slipping again, despite recent reports that the Federal Aviation Administration was about ready to fly the MAX jets. FAA certification flights are a key step in the MAX approval process, but other things have to happen as well. Investors don’t know the order in which the FAA and other global aviation authorities will proceed.

The production pause could also mean Boeing will deliver MAX jets at a slower rate than previously expected. That would be bad news for cash flow at Boeing, and its suppliers, over the next couple of years.

Boeing referred Barron’s to earlier comments. The jet maker has said it plans to ramp MAX production back up slowly.

Before the second MAX crash involving an Ethiopian Airlines flight, Boeing was making 52 MAX jets a month and had plans to increase production to 57 a month in 2019. Now the company hopes to ramp back up into the range of 30 jets a month over time. That reflects the damage Covid-19 has done to the global aerospace industry.

Boeing stock is down about 38% year to date, worse than comparable returns of the Dow Jones Industrial Average and S&P 500 over the same span. Spirit shares are down about 57%.

Spirit generates a majority of its sales from Boeing, making the company uniquely sensitive to Boeing news. Other aerospace supplier stocks Barron’s tracks are down about 30% year to date.

The entire aerospace value chain is down Thursday. Aerospace suppliers’ stocks are off about 8%. Airline shares are down more than 9% on average.

Downbeat news about the spread of the coronavirus news and a negative reaction to Fed Chairman Powell’s comments Wednesday sent the broader market lower.

(Al Root- Barron's)

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