On Tuesday, Boeing (BA) stock faced downward target price revisions from two prominent Wall Street analysts. Analysts are concerned about future cash flows. Boeing announced that it will halt the production of its troubled 737 MAX jet.
On Monday morning, Boeing released a statement about suspending MAX production starting in January. The company said that certification extension into next year was the main reason behind its decision to suspend MAX production.
Notably, Boeing expected to receive FAA (Federal Aviation Administration) certification for MAX aircraft in mid-December. The company also hoped to get global training approvals in January, which would have allowed airlines to resume MAX services. However, last week’s events squashed the company’s hopes of the MAX returning in 2019.
To learn more, read Boeing Considering Production Cut or Halt for 737 MAX.
JPMorgan Chase’s expectations for Boeing
On Tuesday, JPMorgan Chase analyst Seth Seifman lowered his target price on Boeing stock to $370 from $400. However, the analyst reiterated his “buy” rating on the stock. Seifman argued that Boeing would still burn cash despite it shutting down MAX production, according to a CNBC report.
In his note to clients, Seifman stated that Boeing’s labor expenses and internal overhead would remain the same. He expects that the company will continue supporting its suppliers to ensure future supply chain, according to CNBC. Seifman thinks that the company will continue to drain cash despite halting MAX production next year.
During the production shut down period, Seifman thinks that the cash burn will be half of what it’s draining currently. He estimates that Boeing will burn over $1 billion in cash every month after it halts MAX production. He predicts that the company is draining nearly $2 billion in cash every month, according to CNBC.
In his note, Seifman wrote, “We estimate that Boeing is burning nearly $2 bn per month on the MAX.” He mentioned that the cash drain would “not drop to zero during the halt.” Regarding suppliers, Seifman wrote, “We expect Boeing to support suppliers, which comprise ~65% of the 737 cost base, in order to preserve labor and production capabilities. For now, we assume ~50% of supply chain costs hang around, resulting in monthly cash burn that is still solidly > $1 bn.”
Boeing MAX production halt could hurt US GDP
On Tuesday, JPMorgan Chase’s chief economist, Michael Feroli, warned that suspending MAX production could cut 0.5% of the US GDP in the first quarter. In a note to clients, Feroli said that the production halt would pull inventory growth lower, according to a Market Insider report.
He stated that Boeing did adjust MAX production by reducing the monthly output by 19%. The company didn’t completely halt the output. Therefore, despite frozen MAX deliveries, the inventories keep increasing. As a result, the MAX fiasco hasn’t impacted the US GDP yet.
Currently, the company has 400 Boeing 737 MAX planes in storage. Since Boeing won’t build any MAX aircraft starting in January, there won’t be additional inventory accumulation. According to Market Insider’s report, Feroli wrote in his note that “Accordingly, the expected drag on 1Q GDP growth should be concentrated in reduced inventory accumulation.” He also thinks that the production shutdown will hurt the overall supply-chain.
Working capital drain
Robert W. Baird analyst Peter Arment lowered his target price on Boeing stock by $20 to $322, according to TheFly. However, the analyst maintained his “neutral” rating on the stock. Arment thinks that despite an expected production halt for MAX aircraft, Wall Street’s free cash flow estimates are too high.
In his note to clients, Arment said, “With a significant working capital drain, the production halt decision will allow for less finished goods stacking up and it is considered easier to cut production than it is to force the supply chain to cut and then ramp it back up again,” according to TheFly.
To understand how the MAX production halt will impact Boeing part-suppliers, read Boeing Supplier Stocks Fall on MAX Production Cut News.
Analysts changed stance on Boeing stock
Analysts changed their stance on Boeing stock due to the MAX crisis, which started in mid-March. Before the Ethiopian Airlines crash on March 10, approximately 79% of the 24 analysts had a bullish view on Boeing stock. The remaining 21% analysts recommended a “hold” rating.
However, that proportion changed. As of today, only 43% of the 23 analysts recommend a “buy” or equivalent rating on the stock. About 48% of the analysts have a “neutral” view. Before the Ethiopian Airlines crash, none of the analysts had a bearish stance on the stock. Now, approximately 9% of the analysts have a “strong sell” recommendation.
Wall Street’s average target price on Boeing stock has fallen 16% to $369.55 from $440 before the Ethiopian Airlines crash. The current average target price reflects a potential upside of 12% from the closing price of $327 on Tuesday.
The ongoing 737 MAX crisis has taken a toll on Boeing stock’s YTD (year-to-date) performance. With a YTD return of 31%, the stock was the top performer among Dow Jones 30 Component as of March 8. However, following the Ethiopian Airlines crash, Boeing stock has lost approximately 23% of its market value. The stock’s YTD gain has now eroded to 1.4% as of Tuesday. Boeing stock is 26th among the Dow Jones 30 Components.