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Boeing Analyst Says 737 Max Production Halt A 'Nuclear Option'

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Boeing Analyst Says 737 Max Production Halt A 'Nuclear Option'

Aircraft maker Boeing Co (NYSE: BA) could be hours away from confirming that it will halt or cut back production of the 737 MAX aircraft.

This would be consistent with the company's recent track record of setting expectations and then missing them, according to one analyst. 

Boeing Analyst Says December Return To Service 'Unrealistic' 

Boeing executives and board members publicly insisted the grounded 737 MAX would return to the skies before the end of 2019, but this is no longer looking likely, Bank of America analyst Ron Epstein said on CNBC's "Squawk Box" Monday.

The natural question on many investors' minds is one of "what is going on" at Boeing's C-suite level and even among the board of directors in terms of "not communicating well" with investors and customers, Epstein said. 

Boeing management "had to have known" several weeks ago that a return to service in December is "unrealistic," the analyst said.

737 MAX Production Pause A 'Nuclear Option'

The bull case for Boeing's stock was based in part on the free cash flow generation stemming from the 737 MAX plane.

If media reports are accurate and Boeing pauses production for even a few weeks, it will have a "material impact" on cash flow, Epstein said. 

Investors are also likely to view a pause in production as a "nuclear option" and an indication that "something really must be wrong," he said.

Financing the working capital required to store finished airplanes is a less expensive option versus slowing down the supply chain, which is very disruptive, the analyst said. 

Watching Boeing Suppliers 

Investors may want to pay attention to developments at key Boeing suppliers, Epstein said.

For example, Spirit AeroSystems Holdings, Inc. (NYSE: SPR) continues to manufacture 52 fuselages a month, which is consistent with Boeing's initial production run rate for the 737 MAX, Epstein said. 

Manufacturing parts for airplanes is complicated and needs to be kept as "steady as possible," the analyst said.

If a supplier like Spirit AeroSystems decides to cut its production, it will serve as a "meaningful sign" that Boeing isn't lifting its own production for a "long period of time," he said. 

Boeing shares were down 3.57% at $329.40 at the time of publication Monday. 

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Latest Ratings for BA

DateFirmActionFromTo
Oct 2020Credit SuisseMaintainsNeutral
Sep 2020Alembic GlobalUpgradesNeutralOverweight
Sep 2020Morgan StanleyInitiates Coverage OnUnderweight

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