Suspended MAX Production Dings Boeing Valuation
We still believe the company’s wide moat offers structural protection, though.
Boeing (BA) has announced that it will suspend 737 MAX production in January 2020 until further notice, probably until the aircraft is recertified by the Federal Aviation Administration. As the rate of 737 production increases drives a large chunk of our valuation for the company, this decision reduced our fair value estimate to $349 per share from $357.
We’re now pricing in lower production volume in 2020 and 2021 to account for the forgone production in January-March as well as a slower reramping of production in 2020, which shaves $3.50 per share from our fair value estimate. We believe that Boeing’s goal of producing 57 737 MAXs per month is unlikely to occur in 2020 and instead expect this rate to be achieved in mid-2021, as we believe the supply chain will be unable to easily increase production to its highest-ever levels after a total shutdown. We’re also lowering our margin assumptions on the MAX in 2020-23 to reflect concessions to protect vulnerable parts of Boeing’s 12,000 suppliers, which takes off about $2 of value per share. Finally, we’ve increased our grounding timeline slightly, which removes another $2.50 per share, but we recognize that there is a wider band of uncertainty on this issue. We do not believe that investors have a compelling opportunity to buy the stock.
Burkett Huey does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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