Just when a turnaround appeared to be taking flight at Boeing (NYSE:BA), it has all gone pear-shaped again.
The A&D giant has been facing a crisis since an Alaska Airlines MAX 9 jet experienced a cabin panel blowout, leading to an emergency landing earlier this month. In response, the U.S. Federal Aviation Administration (FAA) temporarily grounded 171 aircraft for safety inspections, and on Friday announced plans to conduct an audit of the MAX 9 production line and its suppliers. Additionally, the FAA said it was considering assigning certain aspects of certifying the safety of new aircraft, which were previously handled by Boeing, to an independent entity.
Consequently, on Tuesday, Boeing appointed retired Admiral Kirkland Donald as a special advisor. Donald is set to spearhead a thorough examination of Boeing’s quality management system and will report the findings to CEO Dave Calhoun and the aerospace safety committee of Boeing’s board of directors.
For a company with such a rich history as Boeing, bringing in someone from the outside for this amounts to a really bad look, says BofA analyst Ronald Epstein. Not to mention, the crisis’ potential impact on production and the bottom-line.
“Increased FAA scrutiny into Boeing’s quality control processes, an increased number of inspections, and the implementation of recommendations by an outside party to Boeing’s quality program could further pressure the pace of production increases,” explained the analyst. “We are honestly astonished, given the company’s legacy and heritage, that an outside party is required to make recommendations. The recovery path to historical 25% cash margins on the 737 program would not only be impacted by lower production levels, but also be hit by the incremental costs of adding increased quality control.”
That said, despite taking a conservative stance with his production and FCF estimates remaining meaningfully below consensus, Epstein notes that after all, Boeing is still “one of two players in a global duopoly for commercial aircraft which are in short supply.”
And in spite of the recent issues, Epstein believes that Boeing has been making consistent progress, albeit at a measured pace, in rectifying some of the internal deficiencies that contributed to its current predicament. As such, he remains “cautiously optimistic.”
“Investors should not expect things to change quickly, but more progress can and will be made,” he summed up.
Nevertheless, while Epstein keeps a Buy rating on Boeing shares, given “increased near-term risks and waning investor appetite,” his price objective is lowered from $275 to $255. Still, there’s potential upside of ~26% from current levels. (To watch Epstein’s track record, click here)
Most analysts also remain on BA’s side. Based on 18 Buys vs. 5 Holds, the stock claims a Strong Buy consensus rating. Moreover, the $273.58 average target suggests shares will climb 36% higher in the year ahead. (See Boeing stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.