Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Let's face it, Boeing (NYSE:BA) investors. We knew this news was coming. We knew this would happen.
Boeing stock just got downgraded.
Guess who just downgraded Boeing?
SteetInsider.com reports that yesterday, two analysts -- Germany's DZ Bank and America's Edward Jones -- both downgraded shares of Boeing, to sell and hold, respectively.
Now, neither of these analysts are particularly high-profile names in the world of stock ratings -- not at the level of a Citigroup or JPMorgan, at least. Neither analyst has said a lot publicly about why they are downgrading Boeing stock. But it's not too hard to guess why.
The likely reason Boeing got downgraded
My Fool.com colleague Lou Whiteman has the details: "An Ethiopian Airlines flight crashed shortly after takeoff from Addis Ababa on Sunday, killing all 157 people on board. While the investigation into the crash is still in its early stages, and it is too soon to determine what happened, the incident looks similar to a Lion Air 737 Max 8 crash last October off the coast of Indonesia that killed all 189 people on board."
And that's really the problem in a nutshell. In less than six months, two units of Boeing's most profitable plane -- the best-selling commercial airliner in history, for Boeing or any other company -- have crashed.
Government regulators are concerned. So far, aviation regulators in Australia, the United Kingdom, Malaysia, Norway, Singapore, and China have ordered all 737 Max airplanes to cease flying in their airspace.
Flyers are worried, too. Marketwatch is tracking a growing trend on Twitter of passengers with paid-for tickets looking for advice on how to avoid flying on Boeing's 737.
And investors? They're terrified. Boeing stock plunged as much as 13.5% in early trading Monday, before closing the day down 4.9%. It's down another 4.9% already today.
Check out the latest earnings call transcript for Boeing.
Pouring salt into the wound
President Trump, let's not forget to mention, isn't helping matters. This morning, the Tweeter in Chief poured salt in the wound, tweeting:
Airplanes are becoming far too complex to fly. Pilots are no longer needed, but rather computer scientists from MIT. I see it all the time in many products. Always seeking to go one unnecessary step further, when often old and simpler is far better. Split second decisions are....— Donald J. Trump (@realDonaldTrump) March 12, 2019
....needed, and the complexity creates danger. All of this for great cost yet very little gain. I don't know about you, but I don't want Albert Einstein to be my pilot. I want great flying professionals that are allowed to easily and quickly take control of a plane!— Donald J. Trump (@realDonaldTrump) March 12, 2019
Way to support America's export economy, Mr. President!
What investors should do now
All this being said, I don't want to minimize the severity of the risks here. Whether or not Boeing is ultimately found to have done something wrong to contribute to these two crashes, the company is going to take a significant reputational hit.
Flyers' faith is shaken. Airlines' faith in the 737 Max may be, too, and that could impact sales, or at the least, give airline plane buyers negotiating leverage to extract price concessions from Boeing.
That being said, Boeing's profit margin is at an all-time high right now, with S&P Global Market Intelligence showing the company's commercial airplanes division earning a 13% operating profit margin last year. Boeing can afford to roll its prices back a bit if its customers insist -- and might even be willing to, as part of a strategy to win more sales and grab more market share from Airbus.
And despite all the risks, one quote from today's Wall Street Journal may be telling: The Federal Aviation Administration is "expected by the end of April to mandate a software fix for an automated flight-control system that played a central role in the first crash involving the" 737 Max.
So without minimizing the tragedies that have already occurred, it really looks like whatever problem the 737 Max may have, America's supreme aviation regulator thinks it's something that can be repaired with a software patch.
In short, this is a fixable problem. It's not something that is going to hold Boeing down in the long term. And at less than 16 times trailing free cash flow, I still think Boeing stock is a buy.