Boeing's (BA +2.19%) 737 MAX in mid-November got the all clear to fly again after 20 months on the ground, removing a significant anchor that has been weighing on shares of the aerospace giant this year.
The news has caused Boeing shares to rocket higher, with the stock up more than 40% for the month as of Nov. 23. But Boeing's issues are far from resolved.
Here's a look at the outlook for the company, to determine whether the stock is a good buy today.
The MAX is back
Getting the 737 MAX airborne again was an essential part of the bull case for Boeing shares. The plane has been grounded since May 2019 following a pair of accidents, and Boeing bled through more than $15 billion in the first nine months in large part because of expenses related to the plane and a lack of revenue coming in while Boeing was unable to make deliveries.
The 737 -- the legacy version and the MAX -- makes up 78% of Boeing's 4,275-plane backlog, and most of those are 737 MAX planes. That total represents more than $300 billion in future orders based on list prices.
Image source: Boeing.
With the plane's engineering problems solved to the satisfaction of regulators, the focus will now turn to Boeing's sales team. The company built more than 400 planes during the grounding that now need to be delivered to customers. That's no easy task due to COVID-19, which has airlines rethinking growth plans and cutting back on fleet expansion.
Overall, Boeing has been hit with about 500 cancellations for the 737 MAX during the grounding, according to UBS estimates.
Boeing should be able to find takers for its inventory, but it will likely have to cut prices to move the metal. Southwest Airlines, one of the largest customers of the 737 MAX, said in mid-November it is in discussions to swap out some of the planes it has ordered for so-called "white tails," planes that no longer have their original buyers, presumably at a discount.
Prior to the grounding, the 737 MAX was hyped as potentially one of the best-selling planes of all time, but even with the recertification, Boeing is likely to struggle to reach that lofty goal. The company had hoped to be making as many as 55 of the planes per month by now; instead, it will likely manufacture fewer than 80 in all of 2020. Suppliers have been advised Boeing hopes to gradually rebuild production to 31 planes per month by 2022.
Airplane sales will lag a travel recovery
The 737 MAX is hardly the only plane vexing the Boeing sales team right now. The pandemic has derailed demand for international travel, and with it, demand for the larger, wide-body airplanes like the 787 Dreamliner. That's a blow, as it was the Dreamliner that helped keep Boeing afloat during the early months of the 737 MAX grounding.
Boeing has pushed the debut of the new version of its 777 back by a year and plans to discontinue the iconic 747. The company in early October said it plans to shutter one of its two 787 assembly lines, reducing production from 14 per month to 10 per month with plans to make just six per month by mid-2021.
Even that rate might prove to be too aggressive. Boeing delivered just four 787s in October and seven in September, meaning current production rates are still outpacing demand. At the minimum, I expect Boeing to move to the six-per-month level sooner than what has been announced, and there could be further downside to the production forecast.
Boeing has cut its forecast for total deliveries over the next decade by 10% due to the pandemic, though it expects an eventual increase in demand to allow it to keep its 20-year forecast steady. Even if that proves accurate, it implies investors are in for a long wait before they see a recovery.
I expect Boeing's order book to stabilize as we move closer to a vaccine, but investors should expect more deferrals as airline customers negotiate to push back delivery of planes on order. Though a deferral is better than a cancellation and should keep Boeing's total backlog intact, it does mean less revenue coming in during the next few years, when it is needed most.
The turbulence isn't over
Boeing will be dealing with the ramifications of this period for years to come. The company's net debt is four times higher today than it was prior to the 737 MAX grounding. And the crash investigation uncovered troubling aspects of Boeing's culture that will be fodder for shareholder lawsuits and could take a generation of leaders to completely untangle.
Despite their recent strength, shares of Boeing are still 50% below where they traded prior to the 737 MAX grounding. Absent some new disaster, it is hard to imagine the stock revisiting its lows, but given the challenges the company faces and the number of factors influencing plane sales that are beyond its control, the recovery is likely to take much longer than what bulls are hoping.
So while it might be safe to buy Boeing shares, there are still many better ways to invest in a nascent aviation recovery. We've reached the beginning of the end of the crisis for Boeing, but the next chapter could take longer than the last. Despite the progress, I see little reason to be excited about Boeing shares right now.
