Reducing Our Fair Value Estimate for Boeing

We are reducing our fair value estimate for Boeing BA to $338 per share from $349 due to a delay in the 737 MAX’s return to service. At the time of writing this note, it is unclear if the MAX's delay is related to the newly discovered software problem that can prevent the aircraft’s flight control computers from starting. Given this information, we have updated our assumptions in a few key ways. First, we are now assuming fewer deliveries in 2020 and 2021, as we expect the production cut will last through June, and that Boeing will have more difficulty re-ramping production in the latter half of the year. Secondly, we are pushing back the cash flow from some of the deliveries into 2021, as the FAA has indicated it will need to certify each aircraft in inventory, rather than have Boeing’s staff complete the certification. Our back-of-the-envelope math indicates that it would be difficult for the FAA's staff to certify enough aircraft in time for Boeing to clear its current working capital and the new aircraft it would produce in the latter half of the year, though we recognize there is a good bit of uncertainty in this estimate. Collectively, these updated assumptions reduced the fair value estimate by about $3 per share. We have also increased the charge that Boeing will need to pay to compensate its customer base, which accounts for the balance of the fair value change. We are likely to update these assumptions and others when the company reports earnings later this month.

We view Boeing’s updated return to service estimate of mid-2020 as reasonable, assuming no as-of-yet unknown problems are discovered. The Wall Street Journal reported on Jan. 17 that a certification flight--a key test for the MAX’s return to service--had been scheduled, but it had been delayed. We view the fact that a certification test flight was scheduled positively and believe that this is indicative of material progress toward a return to service.

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