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Boeing's First Quarter Results Sag On 737 MAX Issues But Unsurprised Investors Shrug It Off

Boeing has slowed its overall 737 production rate, including non-MAX versions, to just 42 a month, down from 52 a month prior to the MAX's grounding.

Article originally published by Forbes. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

Boeing today said its first quarter earnings met analysts’ expectations of $3.16 a share, but the world’s largest airplane-maker suspended its share buy-back program and said it cannot now provide a financial forecast for the remainder of 2019 and beyond because of continuing uncertainties surrounding its 737 MAX line of planes following two crashes that killed 346 people.

The company also said the short term costs related to diagnosing and fixing the problem with MAX aircraft and eventually getting the program back up to full speed will be at least $1 billion. Those costs will include, among other things, keeping all of Boeing’s production workers on the payroll and supply chain vendors fully engaged even though the company has had to cut the 737′s production rate significantly as a result the MAX issues.

Boeing has slowed its overall 737 production rate, including non-MAX versions, to just 42 a month, down from 52 a month prior to the MAX’s grounding.

Shares of Boeing stock dropped slightly upon the early morning announcement but quickly rebounded before the market opened. Thirty minutes after the opening Boeing shares were trading up more than 1% at nearly $378 a share. The trading price peaked a bit above $380 in mid morning before falling back to close at around $375.46, up $1.44 on the day.

Boeing Co

Sell: 373.03 | Buy: 373.15 negative 1.74 (-0.46%)
Prices delayed by at least 15 minutes.

That illustrated that investors largely had factored into their analysis of the airplane manufacturer the uncertainty regarding when it will be able to fully resolve the software issues widely believed to have been major factors in the two MAX crashes. One was the March crash of an Ethiopian Air MAX plane shortly after takeoff from Addis Ababa. The other was the crash shortly after takeoff of a MAX flown by Indonesia’s Lion Air in October.

Boeing reported a first quarter profit of $2.15 billion on revenue of $22.9 billion. That was down 13% from the $2.5 billion it earned in the first quarter of 2018 on revenues of $23.4 billion, which represented only a $2 billion drop in revenue from the year-ago period. Lost revenue, foregone profits and higher costs related to the 737 Max issue were partially offset by higher revenues from the Boeing’s defense and services divisions.

Boeing’s commercial airplane making division, which these days is larger than its military aircraft making division, delivered 149 aircraft in the first quarter, down from 184 in the first quarter of 2018. The difference is almost entirely related to the MAX issues.

Within about a week of the Ethiopian crash in March President Trump asked Transportation Secretary Elaine Chao to ground the 737-800 MAX 8 and MAX 9, the two largest versions of the MAX. That order also triggered a halt in the delivery of those planes to airlines, though Boeing has continued some assembly work at its plants in Washington and South Carolina on those portions of MAX aircraft that will be unaffected by whatever “fix” the company comes up with for the MAX. 

The company said it will offer guidance on its future financial performance at some as-yet undetermined time in the future once it has more clarity regarding a fix for the MAX’s software and its ability to once again deliver copies of the best-selling plane in company history to customer airlines. It withdrew its previous financial guidance for the rest of the year because it was prepared prior to the MAX’s grounding and therefore does not reflect the new situation in which Boeing finds itself.

Once the MAX is recertified by the Federal Aviation Administration and foreign aviation safety regulators Boeing CEO Dennis Muilenburg said the company’s aim will be to ramp up production rates quickly. That’s why it won’t be laying off production workers or slowing down the flow of parts from its supply chain vendors.

The MAX is the newest version of Boeing’ long-running line of single-aisle jets for use mostly on short- and medium range jets.  The MAX, however, has greater range than previous 737s and more seats than most earlier versions. Those newer capabilities have been key to the MAX’s huge sales success. The two crashes, however, have introduced considerable financial uncertainty regarding Boeing’s near- and mid-term financial outlook.

Muilenburg assured analysts, investors and reporters on the company’s quarterly earning conference call Wednesday morning that Boeing is “going to get that airplane back up and flying for our customers.” He conceded that the process will take more time than he or anyone at Boeing would like but added that getting the problem – believed to be software that in certain conditions erroneously can point the plane’s nose down to overcome an aerodynmic and then resist pilots’ efforts to bring the nose back up – properly diagnosed and fixed permanently is critically important.

“We have to earn and re-earn the trust of the flying public,” Muilenburg said.

An team of experts enlisted by the FAA to watch closely over Boeing’s efforts to diagnose and fix the MAX’s problem recently indicated that the Boeing’s emerging plan to fix the problem with a combination of new software and pilot training appears to be the right approach. Analyst Jim Corridor at CFRA Research told the New York Daily News that the assessment of that FAA panel of experts shows that “the return of the plane to flying is now a ‘when’ question rather than ‘if.’ ” He added that he remains “ firm in our view that Boeing will survive this with its order book largely intact.”

Boeing today reported a backlog of more than 5,600 ordered-but-undelivered planes worth $399 billion. More than a third of those are 737s, and a majority of those are MAX versions. That total backlog is down from the 5,900-plus orders worth $412 billion that Boeing reporters after the end of 2018’s fourth quarter. The slippage reflects mostly cancellations of 737 MAX orders by several customer airlines in the wake of the Ethiopian crash and its apparent linkage to the Lion Air crash last October.

  Analysts also still expect the MAX version of the 737, which entered service only 23 months ago, to be a long-term success despite the huge amount of negative news coverage associated with the two crashes and the grounding of the entire MAX fleet world wide. The various MAX versions of the 737 already represent 33% of Boeing’s revenue over the next five years according to Goldman Sachs’ estimates. Analysts also expect that Boeing will remain significantly profitable even while it struggles to recover from the ongoing MAX issues.

Still, the grounding itself, the related delay in deliveries of MAX aircraft, the cost of discovering and implementing the “fix” to the MAX’s apparent defect, the reputational damage, and the still-undetermined size of the financial liabilities created by the crashes and Boeing’s failure to meet its contractual delivery date obligations have introduced considerable downside risk for Boeing. Yet that uncertainty appears to already have been factored into the company’s share price, which peaked near $395 just before the Ethiopian Air crash. However, Boeing’s stock still is up about $50 a share from its selling price a year ago, and up more than double its price from two years ago primarily because of the strength of sales the MAX line and Boeing’s very popular 787 Dreamliner line of international-range wide body jets.

The market’s muted response this morning despite the company’s disclosure that its cash flow dropped almost 10% to $2.8 billion in the first quarter from $3.1 billion in the year-ago period reflects investors’ continued faith in Boeing’s long-term prospects. Those prospects are built largely on the successes of the MAX and Dreamliner models. It also is obvious that investors already had factored short-term financial hits related to the MAX crashes into Boeing’s share price even before today’s earings announcement.

Boeing’s first quarter cash flow drop was driven almost entirely by the cessation of MAX deliveries. While plane makers take in deposits when airlines order planes and do receive progress payments during planes’ construction, the by far largest payments that Boeing gets from airline come upon delivery of planes.

Thus, because Boeing was able to continue delivering MAX planes to airlines until March, and because it does not expect to resume those deliveries until at least sometime in the third quarter, it is logical to expect the company to report another year-over-year decline in revenue for the second quarter and, likely the third quarter. How much those declines will be and how that will ripple through Boeing’s financial performance isn’t yet clear. That’s why the company cannot yet issue new financial guidance.

Boeing officials have hinted strongly that they are close to presenting to the FAA a plan to fix the software issues believed to have been significant factor in both MAX crashes. American, Southwest and United, the three U.S. carriers currently flying small numbers of MAX planes, have removed those planes from their schedules through at least early August in expectation that a fix can’t be implemented until at least until then.

This article was written by Dan Reed from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to

Article originally published by Forbes. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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