Boeing's 2020 to be Marred: MAX Grounding and COVID-19

Wide-moat Boeing BA reported a difficult first quarter as the firm weathers two concurrent challenges: the grounding of the 737 MAX and the coronavirus pandemic. We’re maintaining our $281 per share fair value estimate for the firm. As the firm cannot deliver its best-selling product and aircraft markets are reeling from the COVID-19 pandemic, sales declined roughly 26% and free cash flow came in at negative $4.7 billion. Management indicated that they would take on debt to fund operations until cash flow returns. But Boeing must first find sources of debt capital, and then receive an airworthiness directive for the MAX and purge working capital to generate cash flow.

At the moment, we are comfortable with Boeing’s ability to raise capital. The firm has access to a $9.6 billion credit facility and about $17 billion in loans and loan guarantees from the government from the CARES Act. The firm’s debt covenants are balance sheet-based, so we are not worried about solvency for the time being.

The 737 MAX receiving an airworthiness directive is a critical component of our thesis on Boeing. Management confirmed that the COVID-19 pandemic has pushed back the firm’s target for an airworthiness directive for the MAX to some time during the third quarter. While we think it's difficult to say with any certainty when the MAX will be recertified with the pandemic slowing down workflow, we continue to think that a third-quarter recertification seems reasonable assuming no additional slowdowns. We expect that the debt available to the firm will allow it to survive if grounding lasts longer than the updated target.

The firm needs to purge inventory to return to positive cash flow, and the COVID-19 pandemic has financially strained airlines. We assume that the most challenging period for airlines will be the second quarter of this year and that Boeing will be able to place the MAX with airlines as replacements for older aircraft that were retired at the beginning of this crisis.

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