Boeing's 737 Max is finally cleared to fly. Here are 5 things investors need to know

Published Fri, Nov 20 20201:33 PM ESTUpdated Fri, Nov 20 20202:35 PM EST

Key Points

The FAA this week lifted its 20-month ban on Boeing's 737 Max that was sparked by two fatal crashes.
Boeing is trying to repair its reputation after the crisis but is facing a dearth of demand for new jetliners that have dropped in the pandemic.
Airline customer are reeling from a plunge in travel, which has driven up aircraft deferrals and cancellations.

Boeing 's stock is on a tear this month. The nearly two-year flight ban of its best-selling plane has come to an end . Positive Covid-19 vaccine trial results lifted the prospects for air travel . Together that news has helped boost Boeing shares nearly 40% in November. Analysts think the stock will climb even more. For example, Bank of America's Ron Epstein, a leading aerospace analyst, raised his price target for Boeing to $230 from $175 after the Federal Aviation Administration's clearance on Wednesday of the Max. Shares closed Thursday at $205.67. "While the mandatory changes and new training requirements will not allow the 737 Max to return to service immediately, we view this event as a major milestone towards the Max flying once more, which significantly reduces risk to Boeing's equity," he wrote. Even with the rally, Boeing's stock is still down 38% this year, while the the S & P 500 has added more than 10%. Epstein and other analysts note that Boeing is not out of the woods. Coronavirus cases are on the rise, driving down air travel demand, and the 20-month grounding of its best-selling aircraft will have lasting financial scars. Here is what investors need to know: Deliveries can resume The FAA's decision to allow airlines to fly passengers on the Max again came after Boeing made software and training changes for the planes. While expected, it is no doubt a turning point for the manufacturer. Boeing executives are eager to turn the page and try to restore the company's reputation after 346 people were killed in the two crashes: Lion Air Flight 610 on Oct. 29, 2018, and Ethiopian Airlines Flight 302 on March 10, 2019. Investigations revealed design flaws while internal Boeing documents showed some employees expressing safety concerns, mocking FAA regulators and boasting about getting approval for less stringent training requirements. "Our values define us and guide our every action. In simple terms, we live them," Boeing CEO Dave Calhoun said in an employee memo after the FAA's announcement. "We will always step up and do what is right — holding ourselves to the highest standards of safety, quality and integrity, and speaking up when we see behavior that goes against these values." The company's leaders are also eager to regain financial stability. The FAA's decision, which hasn't yet been followed by other aviation regulators around the world, will allow Boeing to deliver its best-selling jet again after almost two years. Boeing has about 450 planes that have been built but are unable to deliver, and it will take another couple of years to work through that inventory. Airlines had close to 400 of them already in their fleets at the time of the grounding. Coronavirus and cancellations The virus exacerbated Boeing's crisis. The manufacturer's airline and leasing company customers have been reeling as travel demand plunges and they scramble to slash costs. The International Air Transport Association doesn't expect passenger traffic to get back to 2019 levels until 2024. The pandemic has led Max customers Aeromexico and Norwegian Air Shuttle to file for bankruptcy protection. Cancellations of the planes are on the rise, and the lengthy grounding made it easier for customers to scrap some of their orders. Brazil's Gol, an all-737 airline, has already cut 34 planes from its original order of 129 planes. In the first 10 months of the year, Boeing has lost orders for close to 400 planes, while its main rival Airbus won 308 orders over that time period. Airbus also has captured demand for a long-range version of the A321 from big Boeing customers including American and United . That gives it an advantage while Boeing's plans for an all-new middle-market plane were derailed by the Max crisis and pandemic. Cancellations aren't the only problem. Such big Max customers as Southwest Airlines have delayed delivery plans of the new planes. That's an issue for Boeing because it receives the bulk of an aircraft's price when it hands the jetliner over to customers. Analysts don't expect Boeing to get to positive free cash flow until the end of next year, at the earliest. Wide-body production and demand The Max isn't Boeing's only problem. Demand for the more expensive double-aisle planes used for long international routes had been slipping even before the virus spread around the world. Commercial jetliner sales peaked in the middle of the 2010s. Wide-body demand further eroded amid trade tensions between the U.S. and China last year. Boeing had already cut production rates of its 787 Dreamliners. It announced it would cut production of those planes to six a month, after ramping up output to 14 a month last year. It will also consolidate production of the planes at its South Carolina factory to cut costs. International travel is expected to take longer to recover from the pandemic than domestic travel, another deterrent for airlines to refresh their fleets. Defense in focus With Boeing's commercial aircraft business hamstrung by the 737 Max crisis and pandemic, Boeing's defense business has gained more importance. Boeing's defense-business revenue fell 3% in the first nine months of the year to $19.5 billion and accounted for 45% of Boeing's total sales in that period. Last year, it generated about a third of Boeing's sales. Meanwhile, Boeing's commercial aircraft revenue dropped 54% in the first nine months of 2020 to $11.4 billion compared with last year, and that unit brought in just over a quarter of company sales. That was down from a 42% share of sales in the first nine months of sales in 2019, even though the Max was grounded for most of the year. The defense business has proven more stable. President-elect Joe Biden, especially if Republicans maintain control of the Senate, isn't likely to significantly chip away at the defense budget. "A mixed government is actually best" for the defense budget outlook, said Richard Aboulafia, vice president of analysis at Teal Group. But the unit isn't without growth risks in the pandemic. "We're not planning on defense spending to go up in any appreciable way," CEO Calhoun told analysts on an earnings call last month. "So I don't think we're looking at that world through rose-colored glasses. I expect real pressure on that market." An eventual recovery Boeing's total debt tops more than $60 billion, according to FactSet. The manufacturer sold a record $25 billion in debt last spring . Its airline customers have been doing the same, which could curtail demand for new aircraft in the future, Moody's Investors Service transportation analyst Jonathan Root said this week. If vaccines are widely available by the end of next year, that "will be the primary catalyst for airlines to restore their investments in new aircraft," Root added. Boeing also lacks the competition present in other sectors. Airbus and Boeing dominate aircraft manufacturing. And Boeing's backlog of more than 4,000 planes will keep it busy for several years. "They face big challenge, but they'll get through it," said Aboulafia. "Frankly, their best friend is they're in a business with extremely high barriers to entry."

Boeing 737 Max airplanes sit parked at the company's production facility on November 18, 2020 in Renton, Washington.

David Ryder | Getty Images

Analysts think the stock will climb even more.