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737 Max groundings put a major source of Boeing's revenue at risk, Wall Street warns

Key Points
  • There is rising uncertainty about the future of Boeing's 737 Max, its most popular aircraft model.
  • "We believe investors were pricing in very limited risk to the 737 ramp-up profile, which now has greater risk within the wide range of possible outcomes following these incidents," Goldman Sachs analyst Noah Poponak says in a note to investors.
  • Boeing has a backlog of more than 4,600 orders for the 737 Max, and Goldman believes the aircraft makes up 33 percent of Boeing's total revenue for the next five years.
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Boeing's stock posted its biggest two-day drop in a decade, and several Wall Street firms are warning that investors are still not anticipating the risk now facing the company's core airplane model.

Even if Boeing's 737 Max planes don't remain grounded for long, Goldman Sachs warned on Wednesday that the two deadly crashes since October threaten a major part of Boeing's revenue in the years ahead.

"The 737 MAX is the largest product revenue and EBIT (earnings before interest and taxes) contributor at Boeing, causing substantial investor questions on the situation," Goldman Sachs analyst Noah Poponak said in a note to investors. "We believe investors were pricing in very limited risk to the 737 ramp-up profile, which now has greater risk within the wide range of possible outcomes following these incidents."

Key to Poponak's warning is his firm's estimate for how much the 737 Max fits into Boeing's future. Over 60 percent of the 385 Max aircraft in service around the world are now grounded but, more importantly to Boeing is the immense order book. Boeing has a backlog of more than 4,600 orders for the 737 Max, and Goldman Sachs believes the aircraft makes up 33 percent of Boeing's total revenue for the next five years.

"On the one hand, should the 737 MAX problem be contained to a software fix, this would likely be a quicker and less costly fix implementation," Poponak said. "On the other hand, if it is determined to be a more comprehensive design flaw that requires more redesign it could take long and be costly."

Goldman Sachs has a buy rating on Boeing with a $425 per share price target. It was trading at $380 per share in Wedensday's premarket, up 1.22 percent.

Here is what all the major Wall Street firms are saying about the Boeing 737 Max:

Cowen – Outperform rating, $475 price target

"Potential For More Bad News Over Near Term - Airlines won't be able to fly the MAX until their regulatory bodies lift the grounding, and they may well decide to resist accepting MAX deliveries temporarily ... we estimate that a one-month slip of all MAX deliveries (~60-65 planes) would push out ~$1.8B in cash receipts. However, we don't see BA or suppliers slowing or suspending production since the cost of doing so would be prohibitive while delayed receipt of delivery proceeds would be largely a timing issue."

UBS – Buy rating, $525 price target

"Yesterday we hosted a call with Dr. R. John Hansman, the T. Wilson Professor of Aeronautics and Astronautics at MIT and Director of the MIT International Center for Air Transportation ... Prof. Hansman also addressed how fixes can be executed depending on the nature of a problem (software vs. hardware) ... As more information is learned additional changes could be required which could require a full fleet grounding; however, he does not believe that is likely despite some regions/airlines making that decision already.

Barclays – Buy rating, $400 price target

"In a worst case scenario, assuming a full grounding of the MAX fleet, we estimate the monthly cash flow impact to BA in a range of $750M-$1B. This assumes a full stop of deliveries (including progress payments on deliveries due in next year) as well as financial penalties likely due to the airlines that currently operate MAX associated with the loss of capacity."

Morgan Stanley – Overweight rating, $500 price target

"A possible grounding of the MAX fleet has wide-ranging implications and skews neutral to negative mainly in the near-term ... Ultimately, we are of the view that implications are likely to be short-lived, covering weeks and months as opposed to quarters and years, pending further clarity on safety and any necessary fixes."

Edward Jones – Downgrade to hold (On Tuesday)

"The accidents may result in additional expense and some delay in orders, which, from a business perspective, could pressure financial results ... Both flights had similar patterns after takeoff, raising some concerns about the automation of the flight control system ... A primary downside risk to shares, in our view, is the continued concern about safety in the 737 Max 8, leading to order cancellations."

Correction: This story was revised to correct that the Goldman Sachs note was sent Wednesday.