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  1. Home
  2. / Investing
  3. / Stocks

Boeing's Bad News Spills Over to Broad Supply Chain

Turbulence with Boeing's MAX jets jolts suppliers.
By KEVIN CURRAN Jun 27, 2019 | 12:19 PM EDT
Stocks quotes in this article: BA, SPR, SNIRF, HXL, ARNC, ATI, GE, EADSF, OERLY

Boeing's (BA) grounded planes and backlog are causing a ripple effect across its supply chains.

After from Boeing's morning slide as more setbacks on the 737 MAX 8 appear in store, key suppliers like Spirit Aerosystems (SPR) , Senior plc (SNIRF) , Hexcel (HXL) , Arconic (ARNC) , Allegheny Technologies Inc. (ATI) , and General Electric (GE) could be in line for lingering after-effects.

"A key takeaway from out meetings at the Paris Air Show was that suppliers will have to either cut below 52 per month on MAX, or face an extended stay at 52 (per) month likely well into 2020," Barclays analyst David Strauss said. "We don't think this is largely reflected yet in consensus expectations for the suppliers with large OE exposure."

Boeing recently reduced production targets to only 42 planes per month amidst the uncertainty surrounding the plane's safety. If production is again curbed, that impact only increases.

Spirit makes much of the 737 MAX, and derives most of its revenue from production of parts for these planes. As such, it has already been forced to reduce work hours for employees as it cuts production to deal with the grounding, according to statements from The Society of Professional Engineering Employees in Aerospace. Additionally, the company is contending with technical issues in the parts of its production that have exacerbated problems with the planes, adding complexity to the sticky situation.

As a result of the tempered expectation for deliveries and the resulting ripple effect through supply chains, Strauss suggested consensus estimates on many off the stocks, Spirit Aerosystems in particular, are set too high ahead of their earnings.

"Beyond SPR, we see the most risk for ATI where our 2020 EPS estimate is well below consensus," Strauss explained. "For HXL, we think ~10% EPS growth in 2020 remains achievable, even if MAX is flat to down, given growth in defense and wind. For ARNC, we are below expectations in 2020, although operation improvement in EP&S and GRP could offset MAX impact."

Senior plc also dropped drastically on the London exchange on the day as the firm's London-based analysts warned of a "supplier reset" and downgraded the stock.

Boeing has been vocal about honoring its commitments made to suppliers and continuing to pay for built up inventories, but negotiations on slowdowns in production rates across the supply chain will of course have a harmful impact.

Risk Diversification

Engine producers like GE, however, appear to be more insulated not only because of larger and more diverse businesses, but their ability to work with other airplane manufacturers like Airbus (EADSF) that could be poised to pick up market share.

The initial implication of Boeing's troubles was understandably concerning for GE as the company is GE's second largest relationship after Swiss tech giant OC Oerlikon Corporation (OERLY)  . The 737 MAX's woes could also impact both GE Aviation, which manufactures the LEAP-1B engines alongside Safran Aircraft Engines SAFRF, and GE Capital Aviation Services (GECAS), which purchases MAX 8's for its jet leasing service and is among Boeing's largest customers.

Yet, despite a slower break-even expectation likely on the engines, the diversification is key.

"[We have] over 1,200 engines in service at 100 operators across the 320Neo family and the 737 Max, a terrific product positioning," GE Aviation CEO David Joyce told investors following the second crash of a MAX jet in March over Ethiopia. "We're holding 58% win rate on the [Airbus] 320Neo's, 320s, family and a sole source on the [Boeing] 737 Max and the COMAC C919, which is still in development."

Additionally, the company's GEnx engines are the preferred engines for Boeing's less controversial models like the 787 Dreamliner.

As such, GE is in the catbird's seat as far as engine supply across the world's three largest manufactures and can likely mitigate engine losses as demand dynamics change.

China Churn

Of course, the book of orders comes further into question ahead of the G-20 meeting in Osaka this weekend, considering the buy-in of growing Chinese airlines has allowed the airplane manufacturing industry to become a bargaining chip in the ongoing trade war between Washington and Beijing.

Earlier this year, a Chinese customer delayed an order for 100 MAX 8 aircraft amidst the uncertainty, stinging the company's much-touted backlog as it continues to deal with lawsuits from airlines that had become reliant on the craft.

The position of pushing through orders of American-made planes become severely weakened amid the recent news and could curb future orders, especially as Chinese producer Comac continues to ramp up. At the very least, any impact on the negotiations could cost Boeing billions in future revenue from the 100-plane mega-deal.

Details on the aviation industry's outlook in any trade talks will be big for Boeing on Friday's G-20 meeting. But as Boeing's big position in the economy suggests from its sprawling supplier relationships, it will be big for many more companies than Boeing alone.
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TAGS: Litigation | Investing | Politics | Stocks | Aerospace | Airlines | China | Europe | Analyst Actions | Stock of the Day

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