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Boeing: Buy The Fear – The Boeing Company (NYSE: BA)



Source: Washington Post

Thesis

In the first quarter, US stocks had the best start of the year since 1998. S & P 500 increased by almost 13%, which was the best quarterly performance since the third quarter of 2009 and the best beginning of the year since 1998. Dow, Nasdaq and Russel received 11%, 16% and 14% respectively. An important legend for Dow in the last month was Boeing (BA), whose stock fell by more than 10% in the last month alone. This was after the tragic accident that occurred in Ethiopia. In this article I will explain why I have continued to buy the shares during this downturn.

10. March, Ethiopian Airlines Flight 302 left Bole International Airport on its way to Jomo Kenyatta International Airport in Nairobi. Shortly after the plane lost contact with the Ethiopian tower, it crashed and killed 157 people. For me, this was a very personal accident because I flew on the same plane a number of times. I also lost a close friend who used to work for General Electric's (GE) Health Unit.

We also know that the accident was very similar to the previous Lion Air accident on October 29 . The cause of the accident was the error in the angle of attack sensors (AOA), which mistakenly activated the Maneuvering Characteristics Augmentation System (MCAS) while the plane climbed. This led to the aircraft's nose leaping down, and due to proximity to the ground, the pilots could not intervene. We also know that Boeing has been working on a software update that will soon be distributed.

In addition, we know that Boeing has been sued by passengers and that a number of airlines have canceled the Boeing 737 Max orders. Also, while the company has been forced to stop delivering new aircraft, production has continued. Finally, and most importantly, we know that Boeing is currently under investigation by the Ministry of Justice.

Cause 1: Order orders Not large enough

Investors are concerned that Boeing will see large cancellations of the Boeing 737-Max orders. If the airlines cancel the booking, it would be a big deal for Boeing because it is the best-selling model. The table below shows the order numbers and feedback of the various aircraft made by the company.

Source: Boeing

Already, a number of airlines have announced that they will cancel the model. Indonesia's Garuda Airlines, ordered 50 737-Max in 2014 and has received only one. Last week, the company announced that it would cancel the remaining 49 orders. Lion Air also has mulled canceling multiple orders from Boeing. Vietjet and Russia's Utair Aviation also consider order bookings.

While some order cancellation is poor, I believe that the advertised cancellations are not large enough. In fact, all companies with large aircraft orders such as FlyDubai, RyanAir and Southwest have not sent indications that they will cancel their orders.

There are two reasons why most companies do not want to cancel. First, the Boeing 737 family has been in use since 1967 and has been relatively safe. As of 2015, 368 accidents and incidents have been involved. In total, more than 10,500 Boeing 737s have been delivered. Therefore, the general family in the 737s has been relatively safe over the years. They have also been very popular with the airlines. In addition, other than the MCAS problem – which is solved – the plane is safe, without major incidents.

Second, it is difficult for customers to replace Boeing because the company operates in a duopoly with Airbus (OTCPK: EADSY). The 737-Max competes with the Airbus A320 Neo, which has more than 4154 orders and has delivered 549 aircraft. The company produces about 60 Neos every month, which means that it will take nearly 6 years to fulfill today's orders. Therefore, it is less likely that more companies will go to Airbus. Furthermore, while the Airbus A320 Max has not been involved in an accident, it has had some engine problems that have led to the grounding.

Therefore, I disagree with the SA contributor, Zoltan Ban, who has claimed that accidents will open Boeing to more competition from Chinese and Russian manufacturers.

Cause 2: Valuation

The decline in Boeing's share has led to a slight improvement in the valuation. With this writing, the company has a market valuation of $ 215 billion. At this valuation, investors pay 21x more of their TTM earnings, which is slightly lower than for Airbus and Bombardier (OTCQX: BDRAF). Its 21-year-old PE ratio is also in line with other industrial companies such as General Dynamic (GD), Caterpillar (CAT) and United Technologies (UTX). Historically, investors have paid a higher premium on Boeing because of its moat in the industry. Therefore, I see the latest decline in PE as an ideal reason to make an entry point.


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