Boeing Has Cut Its 737 Max Production Line By 20%, What Will This Cut Mean For The Company’s Revenue And Stock?
Boeing (NYSE:BA), on the back of several crashes, recently announced that it has cut its 737 production by 20%. While the airline has claimed that the issue is largely related to software, there are doubts as to whether the issue can be merely compartmentalized to software, and whether there are bigger mechanical issues. Considering these issues, several airlines (including Ethiopian Airlines, which was at the center of the controversy), have decided to cancel their orders. Before the production cuts Boeing was expected to bring in a revenue of around $110 billion in 2019.
We currently have a price estimate of $406 per share, which is 13% higher than the market price. You can use our interactive dashboard Boeing’s Outlook (After the 737 Crash) to modify key drivers and visualize the impact on Boeing’s price estimate. In addition, here is more Industrials data.
Effect of the production cuts on revenue, and income
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Boeing’s 737 model contributes 33% to the group’s revenue and almost 50% to its profit. With a backlog of about 5000 aircraft, a 20% production cut would translate into a 6% fall in revenue. We therefore expect revenue to come in the range of $104-105 billion in 2019. With pre-tax income previously expected to be in the $12 billion range, we now expect that it will come in at the $10.6-11 billion range.
We have therefore revised our price estimate from $440 to $406.
Market share
We previously expected Boeing to bring in a market share of around 45% for the year, with Boeing’s wide-body aircraft, the 777 Dreamliner contributing to most of the gains. With Airbus shutting down its A380 production by 2021, we believe airlines will increasingly choose Boeing over Airbus when it comes to wide-bodied aircraft. Alternatively, with the 737 max facing issues, Boeing is set to lose 1-2% market share, Airbus may, subsequently, pick up the slack. The Airbus A320NEO, which is time tested, will be the preferred go to airline, as Boeing reassesses its 737 program.
In conclusion, Boeing will have to take significant steps for the market to gain confidence again. Until it can overcome a trust deficit, we expect that orders for the 737 Max will remain tepid.
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