The surprise departure of Boeing Co. chief executive Dennis Muilenburg on Monday won’t immediately end the aviation giant’s downturn.
Patient investors, though, may welcome it as a sign the company is through with half-measures in dealing with its string of disasters and is now intent on serious reform.
Even a mild rebound in Boeing’s outlook could see the stock regain some of the ground it has lost this year.
The company’s shares (BA-NYSE) rose almost 3 per cent on Monday in the wake of news that Mr. Muilenburg had resigned under pressure from Boeing’s board. The stock, however, is still down by more than 23 per cent since early March. Simply getting back to where it was 10 months ago would represent a major payday for shareholders.
To be sure, restoring Boeing to its former glory will be a big job. The company has stumbled from one catastrophe to another over the past 14 months.
Two crashes of its 737 Max jet – one in October, 2018, another in March of this year – killed 346 people. While many factors appear to have contributed to the crashes, investigators have fingered the jets’ flight-control software as a particular issue.
Aviation authorities have now grounded the 737 Max worldwide. It’s not clear when the jet will fly again.
In July, Boeing announced it had taken a US$5.6-billion pretax writedown to cover potential costs incurred by its airline customers during the grounding. Last week, the company also announced it would temporarily shut down its 737 Max factory.
If Boeing is found responsible for the two crashes, the plane maker will be on the hook for large payouts to the families of those who perished. Its litigation risks in the United States alone could amount to US$1-billion, according to Bloomberg estimates.
In yet another blast to the company’s already scorched reputation, a Boeing astronaut capsule designed for NASA failed to reach the correct orbit on Friday when it attempted an unmanned debut journey to the International Space Station.
So why would an investor choose to buy this problem-ridden stock? Three reasons.
The first is that the business of building jets for commercial aviation is essentially a duopoly, consisting of Boeing and Europe’s Airbus SE.
Both boast massive size, allowing them to survive problems that would sink smaller businesses. While Boeing’s costs related to the 737 Max disasters may be huge by most standards, they don’t look so intimidating in the context of the US$101-billion in revenue the company took in during 2018.
The second is that both companies can count on political support in their home regions. No matter how bad Boeing’s internal problems may be, it is still a U.S. icon and Washington is not going to handicap the business in a way that would cede the commercial aircraft industry to a European competitor.
“Over the years, no American company has proved more adept than Boeing at using its political and legal muscle to boost its commercial fortunes,” Steven Pearlstein, a professor of public affairs at George Mason University in Fairfax, Va., wrote last year.
The appointment of a new chief executive will make it easier for Boeing to placate authorities. Mr. Muilenburg appeared sincere in offering apologies for the recent crashes, but did so with a notable lack of sensitivity, reiterating that the 737 Max would soon be back in the air. In an unusually blunt response, the U.S. aviation regulator publicly chastised him earlier this month for his “unrealistic” forecasts.
With Mr. Muilenburg out of the picture, Boeing’s new chief executive, David Calhoun, the company’s current chairman and a former executive at General Electric Co., should be able to start fresh. If he can win approval for the 737 Max to fly again by this summer, Boeing may be over the worst of the disaster.
This brings us to the third reason to buy Boeing stock: valuation. Consensus analyst estimates predict the company’s revenue will rise to more than US$116-billion in 2020, with earnings a share of US$17.59.
If so, its current share price, at about US$338, would be less than 20 times earnings. That would be a reasonable price for part of a global duopoly – especially one that shows signs of learning from its recent missteps.
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