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Reduced FVE for Boeing on Slower 737 MAX Ramp-Up

Lighter-than-expected 737 MAX deliveries indicate that demand is somewhat softer than we had previously expected.

Wide-moat-rated Boeing BA reported sequentially worse earnings in the third quarter, as the pausing of 787 deliveries due to manufacturing problems crept into financial results. While these results are disappointing, we're more concerned about the continued grounding of the 737 MAX in China and the lighter-than-expected 737 MAX deliveries from inventory, indicating that demand is somewhat softer than we had previously expected. Revenue of $15.3 billion and loss per share of $0.60 missed FactSet consensus by 6.4% and 144.3%, respectively. We are reducing our fair value estimate to $249 from $260 to reflect a slower ramp-up in 737 MAX production and deliveries to reflect these headwinds and an extension of the near-term 787 headwinds. Boeing commercial revenue declined by 25.9% sequentially as 737 MAX delivery increases partially offset the lack of 787 deliveries. Boeing delivered 66 737-type aircraft in the third quarter and has removed about 80 aircraft from total 737 MAX inventory, bringing the total to about 370. The firm had previously said it expected to bring the inventory down by about 50% in 2021 and deliver the balance in 2022, but management now sees the inventory burn continuing until 2023, assuming the firm can resume deliveries to China in the first quarter of 2022. About a third of the inventory is earmarked for Chinese customers that will not take delivery of the aircraft until it is recertified in China. Although the MAX completed its flight test in China this quarter, we would not be surprised if political and trade tensions between the U.S. and China push this target back. We're slowing down our delivery projections below Boeing's, as the delivery pace suggests that the market cannot support the roughly 500 MAX deliveries Boeing expects. We've updated our long-term production assumptions accordingly to reflect production increases off a lower base, and our terminal MAX production rate is 67 per month, seven aircraft fewer than our previous assumption.

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