Boeing Earnings: Quality Puts a Pause on 737 MAX Expansion

Key Morningstar Metrics for Boeing

• Fair Value Estimate: $219.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Boeing’s Earnings

Boeing BA will pause its 737 MAX assembly line expansion plans until the Federal Aviation Administration is satisfied that its manufacturing processes are stable and reliable enough to certify that the firm’s planes are consistently built to their specified design and safety standards. Boeing will also wait a bit longer for the FAA to certify its 737 MAX 7 and MAX 10 models.

During the company’s fourth-quarter earnings call on Jan. 31, CEO Dave Calhoun noted candidly that the pause will benefit Boeing’s manufacturing and supply chain, offering suppliers time to build up buffer stock and employees time to “stand down” and reexamine their intricate assembly process. We anticipate the stabilization will take until mid-2025 and have tapered our forecast for 737 deliveries accordingly, lowering our fair value estimate of the company to $219 from $232.

Excepting the fallout from the near-calamitous door plug incident on a 737 MAX 9, Boeing’s results appear to be turning a corner. Final 2023 results met our forecast for the number of 737 and 787 jets delivered, despite a slower pace in September and October. The company booked $3 billion more in sales and nearly $500 million more operating profit than we had been expecting, outperforming in each of its three operating segments.

In recent years, reworking 737s has dragged $6.8 billion of deferred production and tooling costs into the more than 200 Boeing has in inventory. Delivering these overdue planes will relieve the company of a “shadow” assembly line and associated extra costs. According to Aviation Week’s Fleet Discovery database, Boeing has 127 MAX 8s on hand for customers in China and India and 22 MAX 8s for U.S. customers, most of which are likely to be delivered in 2024. Our forecast now has 737 extraordinary costs dissipating by 2026 and the 737 contributing to the company margin in 2027.