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Boeing Downgraded at Bernstein on 787 Outlook

Boeing has issues with the 787, which the market may not fully appreciate, Bernstein's Douglas Harned said in downgrading the stock.
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Boeing  (BA) - Get The Boeing Company Report shares fell on Monday after Bernstein analyst Douglas Harned downgraded the giant jet maker to underperform from market perform and cut his share-price target to $199 from $221.

Boeing recently traded at $206.86, down 3.4%. The shares have climbed 23% over the past three months.

“We had seen Boeing as fairly valued since the stock rose after announcements on high efficacy vaccines for covid-19,” Harned wrote in a commentary. 

“The 737 MAX is now in service and deliveries have restarted (no surprise, but slightly behind our forecast).”

But, “the five-year delivery and free cash flow outlook was only about half of our 2018 outlook,” he said. 

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“Recently, the 787 has come under more pressure, which we do not believe the market fully appreciates.” As a result, “we lower our 2020-21 free-cash flow estimates.”

Regarding the 787s, “Q4 was supposed to be a big quarter for deliveries, as inspections for manufacturing defects were to be completed and stored aircraft delivered,” Harned said.

“This did not happen. We saw only one delivery in December and none in November. It appears non-conformities related to the fuselage are more extensive than originally thought. Delivery delays continue to stretch out.”

The Chicago company “has said there are no risks to safety of flight, but that we could see more structural fatigue if issues are not addressed at some point (possibly at heavy checks?)” Harned wrote.

“As the scope of non-conformities has expanded, we do not know the full implications for repairs to airplanes in the field. Boeing has acknowledged that nearly 900 airplanes are affected at some level.

"We estimate 787 issues could significantly hurt free cash flow through cost of repairs, compensation to customers, timing of engine cash payments, and less operating leverage."