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Boeing Fell after Barclays Downgrade on Understated MAX Risk

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May. 8 2019, Published 8:07 a.m. ET

Boeing fell on rating downgrade

Boeing (BA) lost another bullish backer yesterday. On May 7, Barclays (BCS) downgraded its rating for the stock to “equal weight” from “overweight,” saying that the disruptions in 737 MAX production and delivery would last longer than it had expected earlier. Barclays also lowered its target price on the stock to $367 from $417.

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Boeing stock fell ~4% yesterday after the news surfaced. The rating downgrade also hit the prices of Boeing’s parts suppliers. Spirit AeroSystems Holding (SPR), General Electric (GE), and United Technologies (UTX) fell 3.3%, 3.1%, and 3.4%, respectively. The plunge in major industrial stock prices also dragged the Industrial Select Sector SPDR Fund (XLI) lower by 2%. The ETF tracks the performances of industrial stocks from the S&P 500.

Barclays’ views

Barclays’ analyst David Strauss in his client note wrote, “We expect the recovery of 737 Max production to take longer than expected,” Bloomberg reported on May 7. The analyst believes that Boeing could resume its 737 MAX deliveries in the fourth quarter of this year. However, Strauss anticipates production rates to return at a slower pace than it had expected earlier.

Boeing had planned to increase its monthly production of 737 MAX series planes to 57 units in June from 52 units in March. However, the company has to reduce its monthly output to 42 in April as air carriers have denied taking deliveries of the planes until safety concerns get cleared.

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At this rate of production, the company will have an inventory of around 300 MAX aircraft by the fourth quarter. Strauss points out the issue that although the company would be able to clear its inventory soon once the delivery process resumes, it will be challenging to increase the production rate. The analyst thinks that Boeing would be able to gradually increase the monthly production rate to 57 units by early 2021.

Additionally, Strauss also cautioned about losing customer confidence over Boeing’s plane safety. Citing a survey, the analyst revealed that about half of the 1,765 people surveyed in North America and Europe have said they “won’t fly MAX for a year or more.” Losing customer confidence would be a major concern for Boeing, as air carriers might delay MAX deliveries.

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