Boeing's 737 MAX Can Return to Service in the U.S.

On Nov. 18, the U.S. Federal Aviation Administration rescinded the emergency order that grounded Boeing’s BA 737 MAX in March 2019, paving the way for its reintroduction into U.S. operations and the resumption of deliveries to U.S. customers. This is a critical step in our bullish thesis on Boeing, but it’s only the first in a series of steps in the company’s turnaround. We maintain our $260 per share fair value estimate and do not see a compelling margin of safety in shares at current prices.

While the resumption of U.S. 737 MAX deliveries is a critical step, aircraft are sold globally, and the plane remains grounded in Europe and China, the two other major aviation markets. We’ve seen optimistic news out of Europe that the MAX is well on its way to returning to service and may receive authorization to resume operations by the end of the year. We are unsure of its progress in China, and we worry that it might be used as a tool in the escalating tensions between the U.S. and Chinese governments. That noted, we are encouraged by the coming change in the U.S. government and think the new administration may have a less combative trade policy, which we think increases the chance of Chinese recertification. Broadly, our fair value assumes that the MAX returns to service globally in relatively short order and that Boeing can deliver aircraft outside of China in the meantime.

Looking forward, we see several longer-term steps in Boeing’s turnaround. First, we believe there is substantial operational risk in Boeing’s plans to simultaneously ramp up production of the 737 MAX and sell the 450 MAX aircraft in storage during the current aviation crisis brought on by the pandemic. Second, Boeing needs a postpandemic boom in air traffic and a resumption of 737 MAX orders to rebuild its backlog. Finally, Boeing needs to ramp production beyond its previous peak of 52 per month, which we think would generate the free cash flow necessary to service debt.

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