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Boeing to Halt 737 Production: ETF Losers & One Likely Winner

Sanghamitra Saha

Boeing BA is for the time being halting production of its 737 MAX airliner after the Federal Aviation Administration (FAA) said last week it would not approve the aircraft’s return to service before 2020. The 737 Max, one of Boeing’s bestselling planes, was involved in two deadly crashes. More than 700 Max jets are now grounded globally. Boeing’s shares have lost 5.8% in the past five days (as of Dec 17).

It is the first time in 20 years that Boeing has stopped 737 MAX production and the move could impede U.S. economic growth. Per JPMorgan's chief U.S. economist, Michael Feroli, Boeing's recent decision will chop 0.5 percentage points off gross-domestic-product growth in the first quarter of 2020. The production cut will weigh on the company's inventory growth and hurt U.S. GDP growth, per the economist. Plus, several parts manufacturers depend on the aircraft for a steady source of revenues.

The grounding of the plane around the world has already cost the company a reported $8.3 billion and the company makes 42 737 MAX planes each month at present, 10 planes lower from the April-level. Boeing has no timeframe for restarting production as yet.

The suspension in production will halve the $4.4 billion in cash that Boeing has “burned through each quarter by making and storing jets”, Jefferies LLC analyst Sheila Kahyaoglu estimated, as quoted on Wall Street Journal. Halting production will push up costs over time by spreading fixed expenses over fewer planes.

Losers

iShares U.S. Aerospace & Defense ETF (ITA)

Among all aerospace ETFs, ITA has the maximum weight at 19.19% and is thus the most dependent on Boeing’s performance. The fund also has more than 2% weight in Boeing’s supplier Spirit Aerosystems Holdings Inc. SPR. The fund has lost 1.8% in the past five days (read: Aerospace and Defense ETFs Gain Despite Mixed Q3 Earnings).  

SPDR Dow Jones Industrial Average ETF (DIA)

This Dow Jones ETF has lagged its peers like S&P 500-heavy and the Nasdaq-heavy ETFs this year, mainly due to Boeing’s underperformance. The fund invests about 7.85% of its total assets in Boeing. Though easing in U.S.-China trade tensions bodes well for the industrial-heavy Dow Jones index, Boeing’s continuing pain may cut into some gains of DIA in 2020.

Industrial Select Sector SPDR Fund (XLI)

This industrial fund is also heavy on Boeing, with around 7% exposure. Apart from the direct impact from Boeing, supply chain issue may be a drag on the overall manufacturing sector in the near term and hurt the fund. Investors should note that XLI may suffer from General Electric’s GE likely underperformance. The fund invests about 4% in GE. Notably, CFM International, a joint venture between France’s Safran and General Electric, supplies engines to the Max and will naturally be hurt by the production halt. When Boeing cut monthly production of the plane to 42, "GE suffered a $400m quarterly reduction in cash flow." XLI is up only 0.8% in the past week despite trade truce (see all industrial ETFs here).

Gainer

iShares MSCI France ETF (EWQ)

Boeing’s loss can prove profitable for its European competitor Airbus. By the end of November 2019, Boeing's deliveries for the year were 345, while its peer handed 725 commercial aircraft over to customers. Alongwith some analysts, we believe that Boeing is likely to “lose out to Airbus in annual orders for the sixth time in the past seven years.”

Airbus currently has a Zacks Rank #2 (Buy). The stock has 4.97% exposure to the fund EWQ. Airbus’ potential gains and super-easy monetary policy in the Euro zone may benefit the fund. The fund has gained 2.1% in the past week. One concern is that EWQ has about 3% weight in Boeing’s supplier Safran too, which is a negative for the fund.

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The Boeing Company (BA) : Free Stock Analysis Report
 
Spirit Aerosystems Holdings, Inc. (SPR) : Free Stock Analysis Report
 
General Electric Company (GE) : Free Stock Analysis Report
 
SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
 
iShares MSCI France ETF (EWQ): ETF Research Reports
 
iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports
 
Industrial Select Sector SPDR Fund (XLI): ETF Research Reports
 
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