Is the Sky Clear for Boeing ETFs After 737 Max Approval?
On Nov 18, Boeing BA won approval from the U.S. Federal Aviation Administration (FAA) to start re-operation of its 737 MAX jet after two fatal crashes (in Indonesia and Ethiopia) that caused two years of regulatory scrutiny.
The FAA elaborated software upgrades and training changes that Boeing must put into effect for the jet to recommence commercial flights after a 20-month grounding, the longest in commercial aviation history, per Economic Times. The Economic Times article indicated that the single-aisle jets like the MAX and rival Airbus A320neo are pillars of the global fleet and huge contributors to the global industry profit.
No wonder, the FAA news offered Boeing about 6.7% gains in premarket trading on Nov 18. However, the company could not hold on to its gains for long as the stock was down 3.2% in the key trading sessions, reflecting a broader market slump caused by rising coronavirus cases and growing lockdown fears. Shares slumped about 1.8% in afterhours too.
Should You Buy the Dip or Stay on Sidelines?
The case for Boeing investing is not company-specific anymore as was the case a few months back. The 737-Max hurdle has finally been crossed by Boeing. The road ahead will be decided by the progression of virus cases, extent of global lockdowns and the future of the aviation industry.
With vaccine hopes strengthening after Pfizer and Moderna’s announcement that their vaccines are about 95% effective in preventing COVID-19, we expect a rally in value stocks in the days to come (read: Value Or Growth: Which ETFs To Play Ahead?).
Moreover, per the latest update, American Airlines AAL plans to relaunch the first commercial MAX flight since the grounding on Dec 29, followed by United Airlines UAL in the first quarter of 2021 and Southwest Airlines LUV in the second quarter. This seems positive news for Boeing.
But then, the MAX crisis has absorbed about $50 billion in market capitalization from the stock in the repercussion of the second crash and grounding, and a quick recoup of $50 billion in value is not easy, especially in the times of COVID-19, per Barrons.
“There is also a lot more debt on Boeing’s books now compared with early 2019. Net debt has gone from roughly $8 billion to about $34 billion. That $26 billion increase is essentially value transfer from equity holders to bondholders,” as quoted on the Barron’s article. Boeing has also reserved billions for customer compensation arised out of the crisis.
Also, the Barrons article elaborated that even after recertification, MAX’s acceptability to air travelers will be a big question. Most would like to wait for a few months of safe flying. So, both perils and possibilities are attached to the Boeing stock.
Boeing shares were priced at $203.30 as of the Nov 18 close. The highest short-term price target offered by 18 analysts covering the stock is $325 while the lowest target price is $148, resulting in a consensus price target of $199. Six analysts believe that Boeing is a buying opportunity while seven analysts think investors should hold it.
Against this backdrop, we believe that the Boeing stock does not offer an aggressive buying option even after the FAA approval. If COVID-19 clears sooner than expected, investors can go for it. Till then, if you want to be part of the moderate improvement (i.e. FAA approval) in Boeing business, you can go for the ETF route. The basket approach minimizes the stock-specific risks.
ETFs in Focus
iShares U.S. Aerospace & Defense ETF ITA – Boeing has about 9.84% weight
Invesco Aerospace & Defense ETF PPA – Boeing has about 8.86% weight
SPDR Dow Jones Industrial Average ETF DIA – Boeing has about 4.44% weight
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Southwest Airlines Co. (LUV) : Free Stock Analysis Report
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