Shares of Boeing (BA) are under pressure after one of its 737 jets operated by the Ukraine International Airlines crashed shortly after takeoff from Tehran, killing all 176 passengers and crew members on board. Additionally, Cowen analyst Cai von Rumohr downgraded Boeing to Market Perform as he believes additional costs from the MAX production suspension and certification delays will hold the company’s free cash flow to $15 per share in 2020 and $26 in 2021 with a "flattish" 2022.
BOEING 737 CRASHES IN IRAN: A Ukraine International Airlines jetliner crashed shortly after takeoff from Tehran on Wednesday, killing all 176 passengers and crew members on board. The Boeing Co. 737-800 single-aisle jet crashed after departing the Iranian capital's Imam Khomeini International Airport en route to Kyiv, according to Iranian state television. The aircraft likely crashed due to technical difficulties, state media quoted Ali Khahshani, a senior public relations official at the airport, as saying. Boeing tweeted overnight, "We are aware of the media reports out of Iran and we are gathering more information." In a follow-up tweet, the company said it was in contact with its airline customer and "stand by them in this difficult time" following the "tragic event."
COWEN MOVING TO SIDELINES: In a research note to investors, Cowen's von Rumohr downgraded Boeing to Market Perform from Outperform and lowered his price target on the shares to $371 from $419, citing the extended Max “crisis.” While Dave Calhoun is good choice to lead the company, additional costs from the MAX production suspension and certification delays will hold Boeing's free cash flow to $15 per share in 2020 and $26 in 2021 with a "flattish" 2022, the analyst contended. Further, von Rumohr added that once 737 MAX deliveries resume, Boeing is apt to choose a more moderate production ramp than its prior year-end 2020 target of 57 per month to assure liquidating MAX inventory in a timely manner.
The analyst also believes MAX production suspension likely will have a greater impact on profit accrual for the remaining 2965 planes in the 737 accounting block than prior adjustments, and expects the slip in MAX certification versus Boeing's assumed fourth quarter will likely require the company to update its concession reserve. Boeing could announce additional costs and charges of more than $10B alongside the fourth quarter results, including a doubling of the $6.1B already earmarked for customer compensation, he argued.
Meanwhile, UBS analyst Myles Walton lowered his price target for Boeing to $360 from $370 while keeping a Neutral rating on the stock, saying his assumption of a shutdown through mid-March on the 737 and a more shallow production ramp drive near-term numbers lower again. The move to shutdown and restart the production system at a slower pace makes sense allowing an extinguishment of inventory versus the prospect of delivering a 2019 vintage aircraft in 2023, he contended. However, the analyst noted that the risk of the 737 ramp from zero/month and assumed return to 57/month in mid-2022 is going to be high with significant layoffs likely in the Tier 2/3 supply chain.
WHAT'S NOTABLE: Bank of America analyst Andrew Didora downgraded Southwest (LUV) to Neutral from Buy with a $60 price target, saying he might have been too early with his September upgrade. The analyst thought the return of the 737 MAX would help drive more normalized earnings power and strong margin growth in 2020, but he now expects Southwest's 737 MAX "headaches" to continue through mid-2020.
PRICE ACTION: In late morning trading, shares of Boeing are down a bit over 1% to $332.94, off their earlier session lows as the broader market recovers following President Donald Trump's press conference in response to Iran's missile attacks on the al-Asad air base in Iraq.
