Boeing's stock price dropped by 4.4 per cent Monday after the company disclosed that it would slow production of its 737 Max commercial jet, the newest version of its most profitable airplane.
At more than US$17 ($25.22) below its previous close, Boeing accounted for the Dow Jones industrial average's entire loss Monday. That's a far cry from the company's bullish 2017 and 2018, when it tended to lead major indices. The company's stock price, US$374.52, is still more than double its 2016 peak.
Boeing faces its most significant reputational crisis in decades, stemming from two crashes of its 737 Max 8 jets, which killed 346 people in Indonesia and Ethiopia. The company has acknowledged in both cases that MCAS, a Boeing-approved flight control system that can force the planes into an uncontrollable nose dive, had been activated in the final minutes.
The company announced Friday after the market closed that it will trim its production rate for 737 Max jets from 52 to 42 planes a month, despite strong demand for them worldwide. Boeing has been unable to deliver the finished planes to customers since early March, when regulators across the world ordered that they be grounded indefinitely.
Boeing said it is maintaining the same employment base while refocusing resources on efforts that will allow the global fleet of 737 Max planes to return to flight.
"We are taking proactive, measured steps to invest in the health of our production system and supply chain, best positioning us for the future," Boeing CEO Dennis Muilenburg said in a statement Friday.
To investors, the decision amounted to an admission that the crisis is unlikely to blow over quickly. Investors reacted sharply to the news, with Bank of America Merrill Lynch downgrading the company's stock rating.
Managing Director Ronald Epstein said the reputational loss from the crisis threatens to hurt the company's bargaining power as it negotiates with airlines, according to CNBC. He noted that he expects the grounding to last six months, and that the company's margins could be affected by penalties charged by airlines.
Cai von Rumohr, managing director at Cowen investment bank, has maintained a "buy" rating on Boeing with a price target of US$460 after reducting the price target from US$475, where it was before the Ethiopian Airlines crash.
"I am not surprised the stock is down," von Rumohr said Monday. "This year's cash flow is clearly going to be messed up from the whole recovery of the Max."
Analyst Carter Copeland of Melius Research said most of the downside for Boeing has already been priced into the company's stock, though he noted that "headlines are going to continue to add volatility to short-term performance."
The prominent credit ratings agency Moody's kept its Boeing rating unchanged, noting that the company has more than enough cash on hand to sustain it in the short term. Boeing had about US$8.5 billion on hand at the end of 2018.
Moody's Senior Vice President Mark Root said, however, that "cash flow pressures will mount" if the fleet is grounded longer than four months.
Investors are closely watching Boeing's response to reports that equipment issues played a role in the Indonesian and Ethiopian crashes. Boeing started exploring the idea of a potential software fix after the MCAS issue was linked to the Lion Air crash in late November, when Indonesian investigators released a preliminary analysis of the flight data.
Boeing is working on a software fix and a new pilot training course designed to convince regulators that the planes are safe to fly. But that software fix was delayed, officials said, when a separate software problem was discovered in the plane's flight control system.
"Anybody who is watching the news flow and the comments out of regulators would conclude that the timeline for recertification (designing and approving the software fix) is a bit longer than first expected," said Copeland, the Melius Research analyst.
Some see a buying opportunity. Von Rumohr, the Cowen director, said Boeing stock is holding up because investors are looking past the next several months and toward a recovery of the 737 Max and its cash flow by 2020.
"Most people expect messy results for the next several quarters and are prepared to live with that," he said. "They feel the stock will bounce back and demand for the Max will come back."