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Why Boeing Shares Will Rebound Once Again

By Investing.com (Clement Thibault/Investing.com)Stock MarketsMar 13, 2019 10:02AM ET
www.investing.com/analysis/why-boeing-shares-will-rebound-200397187
Why Boeing Shares Will Rebound Once Again
By Investing.com (Clement Thibault/Investing.com)   |  Mar 13, 2019 10:02AM ET
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Sunday's tragic Ethiopian Airlines crash, which killed all 157 passengers on board, was the second deadly crash of a Boeing (NYSE:BA) jet in the past five months. It was yet another calamity for Boeing's 737 MAX 8, the newest iteration of its best-selling commercial jetliner, first introduced in early 1968. Over the 51 years this model has been available, over 10,000 units have been sold.

Following Sunday's crash, which early reports are attributing to the plane's flight control system, a variety of airlines as well as European, Asian and Latin American government regulators have grounded the airplanes or barred flights of the 737 MAX 8 over their airspace. For now, the American Federal Aviation Administration (FAA) has declared the 737 MAX 8 ‘airworthy,’ though some Congressional lawmakers are calling for voluntary grounding in the U.S.

BA 5 Minute Chart
BA 5 Minute Chart

Since Monday's U.S. open, Boeing's stock has been whipsawed by volatility. Shares started Monday at $371, 12% lower than Friday’s close at $422. By the end of the day, however, the stock had recovered 7.8% to close at $400. Yesterday, another day of major volatility for the stock, Boeing lost another 6%, closing at $375.41. Is the current slide just the beginning of a potentially deeper plunge?

Panic Selling, Predictable Recovery

Last October, when Indonesia's Lion Air crashed, killing all 189 passengers—at that time the most serious incident ever for Boeing's 737 MAX 8—markets reacted similarly. The stock plummeted on the news, but recovered within days. Panic selling pressured the stock: it dropped 8.8% on the news, but within 48 hours prices were back to pre-crash levels.

An analogous situation occurred in 2013 as well after Boeing's 787 Dreamliners were grounded by U.S. and European aviation authorities because of problems with the planes' lithium ion batteries. At that time Boeing's stock dropped 6.5% as the news spread, but rallied in succeeding days, gaining 97% by the end of the year.

Clearly, the airline manufacturer has been through something like this before. And its stock continues to thrive.

BA Monthly Chart 2005-2019
BA Monthly Chart 2005-2019

There are a number of reasons the scenarios are comparable. It's common—and even predictable—for investors and algorithms to react quickly, and generally prematurely, without having all the necessary data to make an educated decision. The logic is simple: a Boeing airplane crashed, so the company must be in danger.

All too often, this premise simply isn’t true. Many things can cause an airplane crash, and in most cases these events end up being attributable to faulty operation rather than faulty equipment.

As well, detailed crash investigation reports often don’t come out until months, if not years, after the events occur. Merely gathering data from the site of a crash isn’t easy, and often there are many variables at play making definitive results hard to pin down and in several cases almost impossible, meaning reports can be inconclusive.

Five years ago, Malaysia Airlines flight 370 crashed. To this day, there is still no agreed-upon reason for the crash, and disparate theories include a power interruption and a potential hijacking.

Could This Time Be Different?

Yes and no. Two of the same model aircraft crashing within five months of each other, something that's never happened before, shouldn't be taken lightly. And regulatory agencies across the world temporarily banning the aircraft is a major point of concern as well.

However, Boeing still holds a duopoly within the industry, in conjunction with Airbus Group (PA:AIR). This is a strong point in its favor since there are impossibly high barriers to entry for new competitors.

Additionally, both Airbus and Boeing receive significant subsidies from their respective governments, in the form of tax breaks, from the U.S in the case of Boeing, from France and Germany for Airbus. In no small part, that's because having control of the direction of aviation innovation provides a strategic advantage, both militarily and from a civilian perspective. By being able to dictate the future direction of the industry, each country's air superiority is insured, a crucial advantage for any future conflicts.

As long as the U.S government continues to back Boeing, the company will rebound in the long-term. In addition, just a month ago, Airbus announced it was scraping its jumbo A380, leaving Boeing with a monopoly over large passenger carriers.

Adding to that, Boeing has over 5000 outstanding orders for the 737 model. Plus, In 2015, a report by the company concluded: “Over the next 20 years, Boeing is forecasting a need for over 39,600 airplanes, valued at more than $5.9 trillion.” According to Boeing, demand is expected to get even stronger in upcoming decades.

Finally, a report from the Wall Street Journal, published yesterday, says "Boeing is making an extensive change to the flight-control system in the 737 MAX aircraft...going beyond what many industry officials familiar with the discussions anticipated." The article says aviation regulators in the U.S. are "expected to mandate the change by the end of April."

Using 2013 once again as an example, at that time it took Boeing three months to issue a fix, after which everything, including market activity, continued running smoothly. Clearly, Boeing has the capacity to address and alleviate safety issues.

Bottom Line

Given all these factors, we're in favor of holding on to the stock. Boeing's continued health is a strategic advantage for the U.S., regardless of the current political environment.

In addition, Boeing has been navigating treacherous airline safety issues for 102 years. It's overcome such major blows as the JAL flight 123 crash in 1985 that killed 520 people, and Malaysia Airline's flight 17, which crashed in 2014 and was eventually acknowledged to have been shot down, killing 283 passengers and 15 crew.

And of course, the trend in airline safety is obvious, as the average deaths per year dropped last year to 399, compared to an average of well over 2000 deaths per year in the seventies. Boeing will undoubtedly see significant revenue growth from its innovation within aviation industry going forward.

Why Boeing Shares Will Rebound Once Again
 
Why Boeing Shares Will Rebound Once Again

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Chris Canis
Chris Canis Mar 17, 2019 1:43PM ET
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Boeing in  their attempt to install an engine too large on a plane that sits too low by moving the engine forward to move it higher..  This cause a change in a fundamental design  of the center of gravity. So the thrust of the engines is no longer neutral and causes the nose of the  plane to lift up... To counter this Boeing added some AI  automated system to counter this and did not train pilots on this feature or how to disable it quickly, so it seems.   As with all computer systems and data, its garbage in garbage out.   Failure or malfunction of the 1 sensor  put the 787 planes into emergency dives... The software fix that is really needed, is an emergency override or what is used in industrial plants an Emergency Stop.  Something this simple seems to have been overlooked by Boeing.
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Mohamed Aljadeedi
Mohamed Aljadeedi Mar 17, 2019 12:25AM ET
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Thanks very useful
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Michel Simard
Michel Simard Mar 14, 2019 7:57AM ET
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Boeing configurate the computer of the MAX37 to have priotity over the pilot,, I beleive it's the first time it's done,, all airline planes when pilot take controle by using the stick the computer disengage..Boeing as done that priorizing the computer and they intsall only ONE level sensor.. ONE!!!! So if the sensor is bad and send bad reading the computer read it real.. Boeing as sais it will install other sensors ,,, yess great that there is 2 planes down,, watch for serious law suit of gross neglicence, flaw desing etc etc,, no way they will excapte that a low cost
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Varris Kees
Varris Kees Mar 13, 2019 2:12PM ET
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You have to think in numbers & logic. Investing isn't built for your emotions. It will rebound.I'd hate it if it were my family, but I'd also be realistic and know the show will continue no matter what type of litigation the may incur.
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Rony Trade
Rony Trade Mar 13, 2019 2:12PM ET
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I find that comment quite emotional itself... and very ilogic indeed. Read my below message again and learn something that will same you.. your house.
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VINUKRISHNAN Nair
VINUKRISHNAN Nair Mar 13, 2019 2:12PM ET
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true... it's life's which are lost... life's don't rebound with stock.
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Rony Trade
Rony Trade Mar 13, 2019 1:14PM ET
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This article is total rubish. No matter how much ratio you apply, the time frame seem to be reducing between each incident of crash and death by the hundreds. Should we patiently wait till Boeing get its act together, die in the mean time or are they going to stop outsourcing what should not be.. All live does matter, including the one of your own children during your next holiday. In this all argument about price action, there is a specific concern that this time will not go unnoticed : Boeing is no longer a reliable and safe company to invest in. Price as mentioned could retrace a little, but order cancellation, class action and all the kind of compensation in billions that will follow will not. This business is one were high engineering precision, safety and reliability makes all the difference. Boeing doesn't possess theses criteria anymore, the price action as yet to properly reflect theses facts at a mutch lower and fair valuation.
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Nadav Moran
Nadav Moran Mar 13, 2019 12:36PM ET
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Thanks for putting the sense in this situation Clement. People should realize that behind the (very) sad tragedy stands a solid firm that’ve known crisis before.
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Sahil Chawla
Sahil Chawla Mar 13, 2019 12:19PM ET
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I was anyways expecting this rebound news... this slide is just a great opportunity to enter.
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ATOMIQ ILYA
ATOMIQ ILYA Mar 13, 2019 12:19PM ET
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True
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Chris Sundo
Chris Sundo Mar 13, 2019 11:51AM ET
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It looks like the manufacturer cut corners in testing the airplanes before releasing them for sale and made shortcuts in providing educational material to pilots via insufficient elaborate materials like flight simulator videos etc. , my hunch. === Also, with surgeries being robotically supervised from the other side of the world why can't a plane manufacturer provide in-flight tech support when things go dangerously malfunctioning. All they need to do is send a system snapshot via the same satellite they already have voice correspondence with and it's peace of cake. == I guess more people need to die before COMMON SENSE practices become implemented. It's a trade-off between dividends to shareholders versus lives.
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Sahil Chawla
Sahil Chawla Mar 13, 2019 11:51AM ET
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nice idea...but yeah, don't know when it may be implemented or whether it would be implemented...
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Chris Sundo
Chris Sundo Mar 13, 2019 11:42AM ET
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With all the electronics these days it's shocking that during "flight control problems" it is not possible to dial a line into the manufacturer to get an onboard diagnostics of the problems. I do such a thing with my car via Bluetooth between the car's onboard diagnostics and my mobile tab. -- In an airplane cockpit they have voice and whatnot type of contact to the ground. Why do hundreds of people have to die before the COMMON SENSE obvious becomes implemented? == All they need to do is send a data package message to a nearby satellite and on to the manufacturer for immediate supervision and possible correction. They do such tech-support with surgeries and so why not for emergencies where hundreds of peoples' lives are at stake.
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Alan West
Alan West Mar 13, 2019 11:42AM ET
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They do have satcoms.
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Sarah Nicole Santos
Sarah Nicole Santos Mar 13, 2019 11:30AM ET
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Hi! Question, you have compared the safety net of Boeing in the 70s, but it looks like in terms of the shorter term.. 10yr-5yr-3yr comparable death rates were higher compared to competitor. Would you say that there is a factor that in able to release more innovative, newer and competitive technology of airplanes, safety net has been suffering probably due to the release of newly less prolongly tested automated softwares?
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Guy Razzino
Guy Razzino Mar 13, 2019 11:27AM ET
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All People should have a total 100% trust in all Aircraft when they are on all Planes.!!!! Public Safety is Number One, and everyone Expects the Same !!!!
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FRED KOCH
FRED KOCH Mar 13, 2019 11:27AM ET
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Could there be a tradeoff between Earnings vs safety? Software fix is cheap and quick! Just bolting on a huge new engine to the existing airframe could carry HUGE risks!
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