Boeing's Disastrous Year

Editor's note: With the year drawing to a close, we're reflecting on some of our top research and insights in Altimetry Daily Authority. Over the next few days, we'll revisit top essays from founder Joel Litman and Director of Research Rob Spivey.

To kick things off, we're going all the way back to the start of the year... when we published a prescient piece on troubled aircraft maker Boeing.

Today's essay, updated from January 24, focuses on where the issues began. But the hits kept coming as 2024 played out. So be sure to check out our continued coverage from May, August, and October.

One final note... The markets and our offices are closed on Tuesday, December 24, and Wednesday, December 25, for Christmas. Please look for your next edition on Thursday, December 26.

And to all who celebrate, we wish you a safe and merry Christmas.

Once again, aircraft maker Boeing (BA) is in the news for all the wrong reasons...

On January 5, an Alaska Air (ALK) flight was forced to make an emergency landing after the aircraft, a Boeing 737 Max 9, suddenly lost a piece of its cabin fuselage in midair.

The plane had just taken off from Portland International Airport a few minutes prior. It was traveling at a maximum altitude of 16,000 feet when passengers heard a loud "pop"... and noticed a gaping hole in the side of the aircraft.

Pilots immediately turned the flight back around. While no one was injured during the incident, it's still cause for major concern. And that's bad news for investors who remain optimistic about the aircraft maker's future...

As most folks likely know, this isn't the first time Boeing's planes have had issues...

An earlier version of the 737 Max was under scrutiny for years after two deadly crashes in 2018 and 2019. In fact, Boeing was forced to ground the plane for more than a year and a half following the second crash.

This time around, the issue seems to be specific to the Max 9 model... And the U.S. Federal Aviation Administration ("FAA") grounded the plane yet again while it investigated what went wrong.

The agency also conducted a full investigation into Boeing's manufacturing practices, which uncovered even more issues.

It was the beginning of a long journey ahead – for both the company and its stock... Shares fell 8% following the Alaska Air emergency.

Boeing isn't going to be able to turn itself around overnight. It took the plane maker roughly 20 months to figure out what went wrong last time. And along the way, it discovered all kinds of design flaws and maintenance problems... from mis-drilled holes and loose bolts to debris left in fuel tanks.

After that grounding, Congress passed a new bill that was supposed to improve oversight...

Regulators feared that Boeing inappropriately coached test pilots... and that the FAA let it happen.

The new bill made sure FAA certifications remained independent, which should have made the approval process stricter...

Yet the problems kept coming.

In 2021, four U.S. airlines grounded more than 60 of Boeing's 737 Max planes after it disclosed an electrical issue that could affect the backup power control unit.

Then, of course, there are the problems with the 737 Max 9s... which were flagged for faulty door plugs. These planes were grounded until the FAA was satisfied.

All of these issues have hurt Boeing's solid performance. Prior to its grounding issue in 2019, Boeing averaged a Uniform return on assets ("ROA") of 12%... right around the corporate average. By 2018, returns had climbed as high as 20%.

However, Boeing has lost money every year since, as it deals with its production issues...

With so many persistent issues, it doesn't seem like Boeing will return to average Uniform ROA levels anytime soon.

And yet, that's exactly what the market was expecting back in January...

We can see this through our Embedded Expectations Analysis ("EEA") framework.

The EEA starts by looking at a company's stock price. From there, we can calculate what the market expects from future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it on a given day.

Back in January, investors were pricing Boeing like it would be able to put its troubles behind it. They expected Uniform ROA to reach 18% in 2027 – almost as high as it was back in 2018.

Take a look...

In other words, the market was acting like Boeing would perform as well as it did before the problems with the 737 Max began.

Now, the market hasn't completely ignored the problems. Boeing's stock is down almost 20% since we first published this analysis in January.

But investor expectations are still for a full recovery in just a few years' time. If the aircraft maker continues to have troubles – and it sure seems like it might – folks are in for a big disappointment.

With the market pricing in perfection, Boeing shares have nowhere to go but down.

Regards,

Joel Litman
December 23, 2024