Boeing faces a crisis not of its own making in coronavirus, but no less serious

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Boeing Co. is facing the coronavirus-wrought economic destruction on the heels of a crisis of its own making.

Boeing BA, -5.06% has yet to engineer the return to the skies of its 737 Max aircraft, grounded world-wide since March 2019 after two deadly crashes were pinned on the fleet’s faulty antistall system. It now faces cancellations and deferrals by its airline customers as flying has ground to a virtual halt due to efforts to contain the virus.

Sales of commercial airplanes historically have been a bigger chunk of Boeing’s total revenue, but the gap between that and defense sales has been narrowing in recent years. Boeing is one of two makers of large commercial airplanes aircraft and a prime U.S. defense contractor, however, making it all but certain it will get U.S. government support to weather the crisis.

Some $17 billion out of the $2 trillion in government support for businesses amid the pandemic was promised to companies deemed essential to national security, which Boeing would be among the largest even if the company wasn’t specifically named.

Boeing is expected to report first-quarter results before the bell on April 29.

What the numbers are saying

Revenue: Analysts surveyed by FactSet estimate Boeing to report first-quarter sales of $17.4 billion, whittled down from mid-January consensus expectations of sales of $22.6 billion. For the full year, the late-April consensus outlook calls for $73.4 billion in sales; in mid-January, Wall Street expected 2020 sales to hit $110.3 billion.

Earnings: Analysts surveyed by FactSet expect Boeing to post a GAAP loss of 68 cents a share for the quarter; in January, the analysts were calling for GAAP profit of $2.41 a share. Investors are still calling for a slight 2020 profit for Boeing, currently $1.13 a share, down from mid-January estimates of $17.15 a share for the year.

Stock movement: Boeing stock has underperformed the S&P 500 index SPX, -3.06% and the Dow Jones Industrial Average. DJIA, -2.67% So far this year, the stock is down nearly 60%, compared with losses of 15% and 19% for the S&P and the Dow. The stock fell 54% in the January-to-March quarter, compared with a loss of 20% for the S&P and 23% for the Dow.

What the company is saying

Resuming some production: Boeing said in mid-April it was resuming commercial-airplane production at its Puget Sound, Washington state-area facilities in “a phased approach.” Operations there and elsewhere were halted in March as the first shelter-in-place orders in the U.S. were enacted. Boeing South Carolina remains in a halt, which came later than the halt in Washington.

The company said the return to work for some 27,000 Boeing employees in the Puget Sound area, which includes Seattle and its suburbs, was to include staggered shifts, face-covering requirements, and social-distancing measures, among other precautions. Health checks at the beginning of every shift and voluntary temperature screenings were also part of the plan, Boeing said.

Unit sales: Boeing said in mid-April it had delivered 50 commercial airplanes in the first quarter, compared with 149 commercial aircraft in the first quarter of 2019 and expectations of 60, according to FactSet consensus.

What analysts are saying

• “Throwing in the towel far too late” on Boeing as the aerospace and defense company has “challenges beyond a dimmer aero picture.” The company is entering a phase that is “less friendly to equity holders, marked by lower FCF (due to pressures on commercial & potentially defense) and more cash use to support the future business.” Fears about a capital raise have died down, but challenges remain. — Citi analysts, who downgraded their rating on Boeing shares to the equivalent of hold.

• Boeing will likely go through “additional strain” on its balance sheet in the next few years because of the “harsh impact” the coronavirus will have on demand for new commercial aircraft and the potential for order deferrals and cancellations. — Jonathan Root of Moody’s Investors Service, which cut its rating on Boeing’s debt to Baa2, from Baa1.

“The coronavirus is likely to become a significantly greater pressure point on Boeing than the long-running 737 Max crisis,” Root said in a note in mid-April. “We now estimate external funding needs in 2020 to at least double — to $30 billion — compared to our pre-coronavirus expectations,” he said. Boeing already funded about half of that need with a $13.8 billion term-loan draw in February.

The debt ratings agency also has a negative outlook on the Boeing bonds, reflecting “the uncertainty around the duration and impact of the COVID-19 pandemic on global economic activity and aircraft demand,” it said. Boeing’s rating remained in the middle of the investment-grade pack as the company is one of only two makers of large commercial aircraft and a prime U.S. defense contractor, Moody’s said.

• There were “positive implications” for the production restart in Washington, which showed Boeing can go back to work even with social-distancing measures in place in the region; Boeing sent all employees there back, as “one would expect that if a very bad-case scenario of very limited airline ability to take deliveries the remainder of this year were occurring, they would only send a portion back at least temporarily;” and that Boeing “still sees no major change” for the timeline for a 737 Max return-to-service as it has been able to continue to work on the plane’s recertification with U.S. aviation authorities. — Noah Poponak of Goldman Sachs, who has a buy rating and $189 price target on the stock.

Of the 23 Boeing analysts who are polled by FactSet, nine rate Boeing stock a buy and 14 rate it a hold. On average, the price target on the stock is $175.70, implying an upside around 30%.

Originally Published on MarketWatch

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