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Boeing (BA): 737 Max Fix May Not Be So Simple, But This Top Analyst Still Bullish on Stock

support@smarteranalyst.com (Ben Mahaney)

While many thought that Boeing's (BA) troubled 737 Max would be ready for takeoff after months on the ground, the company is backtracking on its original prediction.

Apparently, the airplane manufacturer’s Max problems go beyond a simple software fix. Airplane experts say the company will need to replace a chip in the flight-control computer. Should this chip fail, the airplane could be forced downward, similar to the LionAir and Ethipian Air crashes, which forced the Max grounding in the first place.

Although the media is predicting the 737 Max won’t be ready until the end of the year, Boeing still expects the plane to be flying in September. Cowen's top analyst Cai Rumohr says the company does not think a hardware fix is needed and it continues to work with regulators from across the world to fix the software issues and ensure training reaches the standards set by these agencies.

Nevertheless, Rumohr remains bullish on Boeing stock, maintaining an Outperform rating and $460 price target, which implies nearly 27% upside from current levels.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, Rumohr has a yearly average return of 15% and a 72% success rate. Rumohr has an average return of 28% when recommending Boeing and is ranked #90 out of 5,222 analysts.

Rumohr estimates Boeing “currently has 160-170 undelivered MAX aircraft in inventory,” with a “delay in resumption of deliveries to the end of September…[boosting] this by ~110 aircraft to 270-280.” While the analyst is optimistic that Boeing will resume deliveries in September, he says it is “still difficult to gauge how many MAX’s BA will be able to deliver in Q4.” The company’s priority will be to “prepare the 381 planes in customers' fleets for service,” while it will take time for production to ramp up to levels like last year.

As the Max is expected to sit on the ground for longer than predicted, Rumohr says the updated financial impact is “tough to gauge.” But the analyst’s best guess is that each month of delay would result in an incremental $1.2B of negative cash flow. Using an October-delivery target, the analyst says Q3 cash flow could be “near zero.” Overall, full-year cash flow per share is “sure to lag” the analyst’s estimate of $12-14/share, “possibly by $6-7.” But looking to next year, Rumohr says it is “realistic to look for ‘normalized’” cash flow.

Though Boeing continues to struggle with getting its Max aircraft airborne, many on Wall Street believe this obstacle is only temporarily holding back its stock. TipRanks analysis of 22 analyst ratings shows this long-term confidence, with a consensus Moderate Buy among 17 analysts. Of the 17 analysts, 12 saying Buy, while 5 suggest Hold. The average price among these analysts stand at $436.73, suggesting the stock can rise nearly 20% from its current level. (See BA's price targets and analyst ratings on TipRanks)

 

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