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Why Shares of Boeing Are Declining Today

By Lou Whiteman - Updated Jan 22, 2020 at 9:43AM

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The 737 MAX will not fly in the first half of 2020.

What happened

Shares of Boeing (BA -5.07%) fell more than 5% on Tuesday afternoon after the company said it does not expect its troubled 737 MAX to return to service until mid-year at the earliest. Boeing had originally hoped to have the 737 MAX flying again before the end of 2019, but it's becoming clear that the plane's issues will weigh on the company well into 2021 at least.

So what

It has now been more than 10 months since the crash of an Ethiopian Airlines 737 MAX that killed all on board and prompted regulators to pull the plane out of service. Boeing has failed to meet a series of internal deadlines to resolve the issues with the plane and get it airborne again, and in December said it would halt production to deal with a backlog of jets that were manufactured but can't be delivered to customers.

A 737 MAX in flight.

Boeing's 737 MAX in flight. Image source: Boeing.

Also in December, Boeing replaced its CEO with board member Dave Calhoun, and in the weeks since taking charge, Calhoun has been trying to reassess the 737 MAX situation. Boeing said in a statement today it expects the "ungrounding" of the 737 MAX to begin in mid-2020.

The new timetable pushes back the expected return of the 737 MAX to the skies and will cause extended damage to the growth plans of customers including American Airlines Group (AAL -2.92%), Southwest Airlines (LUV -2.11%), and United Airlines Group (UAL -1.49%). Boeing is likely to be on the hook for billions in future expenses to compensate customers for their troubles, as well as to handle the costs of storing the airframes that are grounded.

Now what

Boeing has been in talks to secure upwards of $10 billion in loans to help it weather the slowdown. With the stock still trading at more than 20 times forward earnings, I wouldn't be surprised if management eventually considers raising cash through an equity offering as well.

Even with the 737 MAX issues, Boeing has an impressive portfolio of commercial aerospace and defense platforms, and should be a long-term winner. However, until there is more clarity about the 737 MAX situation and Boeing's new management team has had a chance to demonstrate they have the situation under control, it remains a dangerous time to buy in.

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Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
BA
$120.70 (-5.07%) $-6.44
Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$42.65 (-2.11%) $0.92
United Airlines Holdings, Inc. Stock Quote
United Airlines Holdings, Inc.
UAL
$43.55 (-1.49%) $0.66
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$16.26 (-2.92%) $0.49

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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