Boeing's guilty plea could cause the stock to rebound: Analyst


Boeing (BA) has agreed to plead guilty to a criminal fraud charge surrounding two fatal 737 MAX crashes from 2018 and 2019. The case was brought back into the spotlight after US prosecutors said the company failed to comply with the 2021 settlement agreement over those crashes. Bloomberg Intelligence senior analyst George Ferguson joins Morning Brief to unpack the news and what it means for Boeing’s future.

Ferguson believes Boeing’s plea deal is positive for the company as they tackle mounting legal issues, explaining, “That’s going to help them focus on the most important thing to do with the company, which is to build more airplanes, generate more cash flow, and generate profits. We’re really looking for a strong rebound for the company in the back half of the year.” He adds that, combined with Boeing’s decision to repurchase Spirit Aerosystems (SPR), the company should be able to improve the quality and turnaround of its plane manufacturing.

However, he notes that it’s not all good news for Boeing moving forward. Ferguson points to the company’s “sullied” reputation following the deadly crashes and emergency incidents on its planes. In addition, the company’s guilty plea could pose a roadblock in future government contracts.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl

Video Transcript

Another big story that we’re watching.

Boeing has agreed to plead guilty too.

A criminal fraud charge surrounding two fatal 737 max crashes from 2018 and 2019.

The case was brought back into the spotlight after us.

Prosecutors said the plane maker failed to comply with the 2021 settlement agreement over those crashes which left 346 killed.

And here as we’re continuing to track the move pre market as of right now, it’s up by about 1.2% right now.

And as we take a look at that early reaction here with shares up just about 1% we, we certainly can, I guess, try to figure out exactly what this means for Boeing here going forward.

You talk about the fact that this was largely expected going off of the reports that we were getting last week.

But now the question is exactly maybe what this means for some of those defense contracts going forward and whether or not that puts some of those contracts in jeopardy and then also just some of the risks that this brings up here for Boeing when we focus about the fact that, hey, maybe this is obviously it’s a hit to their reputation.

But how big of a hit, what this means for investors, what they need to do to win back?

Some of the confidence clearly is a big question mark at this point.

Absolutely.

For more on this, let’s bring in George Ferguson Bloomberg intelligence, senior analyst to discuss this just a little bit more George as you see this plea, this guilty plea come through from growing.

What more largely does this signal for the company?

And, and the way ahead?

Yeah, so I think it’s a um it’s a good sign from the aspect that they’re starting to clear some of these problems, some of these, these legal overhangs uh and that’s gonna help them focus on the most important thing to do with the company, which is to to build more airplanes, generate more cash flow uh and generate profits, right?

We’re really looking for a strong rebound for the company in the back half of the year.

They burned $4 billion in cash.

Uh uh You know, in, in one Q, the company told us to expect it as a similar level of burn in two Q, we saw less airplanes delivered than we expected, so it could be even higher.

Uh They had, they had hit sort of a sub $10 billion cash on the balance sheet level.

At the end of one Q came back to the capital markets to raise $10 billion in bonds.

Uh Again, I think they burn another 4 billion in cash.

They could have about $13 billion of cash.

Uh as they close the second quarter down.

I think that’s a, that’s a low level of cash for the company.

So again, we’re really, they can’t keep burning cash like this.

They’ve really got to start to focus on building airplanes.

And so this, you know, this agreement with the Justice Department, as well as the purchase of Spirit Aero systems.

So they can improve quality throughout all the factories is really part of the turnaround for the company.

The next really big hurdle is they have negotiations with their most important union.

Uh I think they’re already ongoing contract expires in September, that union wants a 40% increase and a guarantee of building next airplane up in the Pacific Northwest.

That’s going to be the next big hurdle.

But Boeing’s got to start to put these behind it so it can build airplanes to generate cash.

George.

Do you think that this is a big blow to Boeing’s reputation?

You talk about some of those upcoming events that we need to focus on here as Boeing does look to move forward.

But how, how tough is that going to be?

At least in the short term?

Yes, I mean, I kind of feel like the reputation has been pretty, pretty, uh, you know, sullied here.

I think it’s frankly probably better to get this done now.

You know, we all know they’ve had problems.

We all saw the door plug come, you know, I saw the video of the door plug come out in the Alaska Airlines.

I think if they could put this stuff to bed now it puts them in better shape, like you said, back after this year and the next year, not talking about it.

But I think we all understand there were problems.

And so I think the reputational damage from this is slight compared to all the other issues they’ve been having.

George.

What’s interesting in our own Alexis Keenan pointed this out within her reporting up on Yahoo Finance.

Now, as she was speaking with a former federal prosecutor, there’s revenue and, and profit implications here too because of if they are indeed, you know, found guilty as they’ve entered, entered this guilty plea.

Ultimately, this impacts their ability to do government contract work as well.

So, what are the potential ramifications that could spill over even to the valuation for Boeing?

Yeah.

So my understanding was as long as the company wasn’t considered a, a felon, I think, you know, look at, I’m not a legal expert somehow.

I think there, there could be a felony charge and conviction against the company.

They would have, they could potentially have problems um and not be allowed to take, you know, government contracts.

Now, I, I think, you know, the way we look at this there are products, Boeing supplies to the US military that I just don’t see any near term, uh, substitute for one of them would be KC 46 tanker.

It’s a program that’s been in the news.

They’ve taken a lot of charges on the program.

Airbus bid for and actually won it initially.

But then after an appeal, Boeing took that contract over, it would be really hard, I think to move that contract at this stage back to somebody like Airbus and the tanker fleet for the US military is 50 years old.

It needs to be replaced.

So I think there’s a lot of need.

We’re watching backlogs in the defense industry build.

So I think the government wants to find a way to make sure Boeing can be a government contractor and important defense prime despite whatever they’re pleading guilty to here.

So I think they’ll find a way through this.

And George when you take a look at this, bogue is now gonna end the oversight of a monitor.

It’s gonna help as we’ll have to spend more on safety and compliance.

Maybe when building aircrafts moving forward, I’m curious just the cost of this, when we talk about the fact that clearly when the the cash burn rate had already spooked investors, looking forward to this, maybe this is going to add even more cost, especially obviously when you factor in the fine.

How big of a head wind is that going to be?

Yeah, I mean, so I don’t have a good number on that because I don’t know what this monitor costs.

What I would say is, I don’t think it’s gonna be a lot.

I think, I think what’s gonna be more important again is it’s gonna be this union contract that’s coming up that I think, could add, uh, a half a percent to a percent of some of the cost of, of manufacturing.

I think that we could all probably agree.

It’s not like Boeing couldn’t use more oversight here and it would be more costly for them to continue to have problems.

And so I think, look in the long run, we kind of know near term next 234 years, you don’t have a Boeing that has margins that look, that will look like what we’re in the, in the pre panem world, right?

They’re just, I think the Book of Business is in at a, at a lower price point because Boeing lost a lot of China business and they had to go out and, and fill the backlog again.

They did it at, you know, some good customers like Southwest and United rather get lower prices.

We know the cost will be higher with oversight, you know, uh like this overseer as well as they need to have internal controls that have more inspectors in place and more training.

So we kind of know the company is not gonna have margins that look like prepa de but look again, I think they just need to stop burning cash and that’s the beginning of the improvement in this story.

And I think they got, that’s only you can only do that through more commercial builds and they gotta start getting that done as they get here to the second half of the year.

George Ferguson.

Always great to get your insight.

Thanks so much for having on with us this morning.



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