Boeing's problems are not over yet

The tug of war between the bulls and bears of Boeing Co. (BA.US) persists. While the company continues to deal with the backlash from two fatal 737 MAX crashes within the span of five month, bullish investors are betting on a swift recovery of this beaten-down stock.

There are 18 buy ratings on the most valuable industrial stock, far exceeding the nine hold and two sell recommendations. The average price target for the next 12 months is $429, implying about 20% upside potential from the stock’s current price of $354.88. However, it's down 1.5% in the past year, and the slide appears to be accelerating: the shares have tumbled 6.8% in the last month.

But the big question for investors seeking financial gain from this situation is whether Boeing has already seen the worst of this crisis which forced the airplane maker to ground its best-selling model worldwide and drastically cut its production. There's no quick answer, though, because it all depends upon the conclusion of multiple inquiries in various jurisdictions, Boeing’s ability to quickly release the software fix, and the lifting of a global ban on the 737 MAX.

This outcome, in our view, is not going to materialize anytime soon. The latest news flow suggests it may take longer than many had expected.

Bloomberg reported yesterday that European regulators assessing changes to Boeing’s grounded 737 MAX will scrutinize the jet’s entire flight-control system before the plane can return to the skies. A report by The Wall Street Journal early this month said that Boeing limited the role of its own test pilots in the final stages of developing the 737 MAX flight-control system.

The big concern was that pilots “didn’t receive detailed briefings about how fast or steeply the automated system known as MCAS could push down a plane’s nose,” the Journal reported. And then there was a story in the New York Times that questioned the company’s culture, saying it often gave preference to production speed over quality.

There is no doubt in our minds that Boeing will ultimately pull out of this crisis. Airlines have no alternative but to pick one from the Boeing-Airbus plane-maker duopoly. But we also fear that BA earnings might take a greater hit before coming back to their normal trajectory. And despite these uncertainties, BA stock is still selling at a premium valuation when compared to the overall market, suggesting to us that there is a greater risk to the downside than upside in the near term. Staying on the sidelines is a better course of action than buying this stock now.

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