Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9

Three aerospace investments to purchase after the emergency of a Boeing 737 MAX 9 provide paths to avoid the worst risk of the fallout from a fuselage door plug blowing out of an Alaska Airlines aircraft at 16,000 feet on Friday, Jan. 5.

The open-ended risk is beyond the control of the Chicago-based Boeing Co. (NYSE: BA), since the Federal Aviation Administration (FAA) announced on Jan. 12 that it would launch heightened oversight of the aircraft company’s production and manufacturing. The actions followed just one day after the FAA formally notified Boeing that the agency has begun a formal investigation into the company due to the Jan. 5 incident when a door plug on a Boeing Model 737 MAX 9 detached from the left side of the plane and fell into a backyard near Portland, Oregon.

Regulators must assess what corrective action is required to ensure the safety of the flying public. Boeing previously suffered two fatal crashes of Boeing 737 MAX aircraft between 2018 and 2019 due to a technical problem that took time to identify and fix.

Image of damaged Boeing 737 MAX 9 courtesy of the National Transportation Safety Board

FAA Acts to Take Corrective Measures

The FAA announced plans on Jan. 12 to:

• Audit the Boeing 737 9 MAX production line and its suppliers to evaluate the company’s compliance with its approved quality procedures. The results of the FAA’s audit analysis will determine whether additional scrutiny is necessary.
• Increase monitoring of Boeing 737 9 MAX in-service events.
• Assess safety risks around delegated authority and quality oversight, as well as examine options to move such functions under independent, third-party entities.

“It is time to re-examine the delegation of authority and assess any associated safety risks,” FAA Administrator Mike Whitaker said. “The grounding of the 737 9 and the multiple production-related issues identified in recent years require us to look at every option to reduce risk. The FAA is exploring the use of an independent third party to oversee Boeing’s inspections and its quality system.”

On Jan. 11, the FAA announced a formal investigation to determine if Boeing failed to ensure completed products conformed to its approved design and were able to allow safe operation in compliance with FAA regulations. To read the FAA’s letter to Boeing about the probe, click here.

On Sunday, Jan. 7, the FAA grounded the 171 Boeing 737 MAX 9 planes that installed door plugs, accounting for most of the roughly 218 Boeing Max 9s in service worldwide. With the FAA’s responsibility to ensure all those aircraft are inspected and safe to resume flying, the time required to return them to service is unknown.

Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9

Investors need to be aware that regulators move at their own pace, without the sense of urgency that typically exists in the private sector to restore a plane to revenue-generating service as soon as possible. Industry analysts generally overestimated how quickly Boeing would recover from its previous 737 MAX aircraft safety problems, so caution is warranted to avert a recurrence.

“Upon receiving the revised version of instructions from Boeing, the FAA will conduct a thorough review,” the agency announced. “The safety of the flying public, not speed, will determine the timeline for returning the Boeing 737-9 Max to service.”

Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9: Avoid Boeing

Boeing is facing a major headwind. The National Transportation Safety Board, as shown in this video, inspected the damaged plane. Four bolts intended to keep the door plug from moving out of alignment were missing, the investigators said. Alaska Airlines and United Airlines (NYSE: UAL) both fly the Boeing 737 MAX 9 and discovered loose bolts in some of their other Boeing 737 MAX 9 planes after the midair emergency spurred inspections.

Part of the investigation will determine whether the bolts had ever been installed, and, if so, how they ended up missing. The matter is financially significant, since roughly 60% of Boeing’s annual revenues come from its Commercial Airplanes manufacturing unit.  Boeing’s stock has plunged in the days following the incident and regulators vow to pursue remedies that may involve the use of third parties as inspectors to maintain quality control.

Chart courtesy of www.stockcharts.com

Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9: Connell’s Correct Call

Chicago investment firm William Blair gave Boeing a buy recommendation last month and affirmed its rating on Jan. 8 amid a drop in the company’s stock price since the 737 MAX 9 incident on Jan. 5. The “terrifying” midair emergency aboard the Alaska Air flight with 171 passengers and four crew members, should not have a “major financial impact” on Boeing unless it happens again, wrote Louie DiPalma, an aerospace analyst at the company.

A less positive outlook for Boeing came from Michelle Connell, president and owner of Dallas-based Portia Capital Management, LLC. She expressed concern about the stock, as I have since it had two Boeing 737 MAX passenger airline crashes on October 29, 2018, and March 10, 2019, respectively. Those accidents caused the deaths of 346 passengers and crew members.

Despite Boeing recently announcing new potential airline orders, Connell said she does not think Boeing is “out of the woods” with its safety issues. The Federal Aviation Administration (FAA) had announced before the Jan. 5 malfunction that the agency will begin further reviews of Boeing 737 MAX planes to determine if they have problems with loose bolts, she added.

The company’s Boeing 737 MAX aircraft have been under scrutiny since before the pandemic and it may take “several years” to put those issues fully in the past, Connell continued.

Michelle Connell heads Portia Capital Management LLC.

Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9: GD

Reston, Virginia-based General Dynamics (NYSE: GD) is an aerospace stock that  DiPalma recommends with an “outperform” rating. The company’s technology division has experienced bookings momentum over the past two quarters that should allow it to continue to achieve solid growth despite the loss of a computer hardware system (CHS-6) contract with the U.S. Army in September, DiPalma wrote in a Jan. 11 research note. At the same time, the Gulfstream G700 certification slipped out of the fourth quarter and will pressure fourth-quarter earnings, he continued.

 

“In our view, the G700 delay is related to timing rather than any quality concerns,” DiPalma wrote. “We expect General Dynamics’ shares to have a strong 2024 as supply chain constraints ease.”

General Dynamics has more than 100,000 employees in 70-plus countries. A key business unit of General Dynamics is Gulfstream Aerospace Corporation, a manufacturer of business aircraft. Other segments of General Dynamics focus on heavy mobile military equipment such as Abrams tanks, Stryker fighting vehicles, ASCOD fighting vehicles like the Spanish PIZARRO and British AJAX, LAV-25 Light Armored Vehicles and Flyer-60 lightweight tactical vehicles.

Chart Courtesy of www.stockrover.com; Click this link to learn about www.stockrover.com.

For the U.S. Navy and other allied armed forces, General Dynamics builds Virginia-class attack submarines, Columbia-class ballistic missile submarines, Arleigh Burke-class guided missile destroyers, Expeditionary Sea Base ships, fleet logistics ships, commercial cargo ships, aircraft and naval gun systems, Hydra-70 rockets, military radios and command and control systems. In addition, the company provides radio and optical telescopes, secure mobile phones, PIRANHA and PANDUR- wheeled armored vehicles and mobile bridge systems.

Chart courtesy of www.stockcharts.com

Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9: LHX

Connell also told me she also likes L3Harris Technologies Inc. (NYSE: LHX), but suggests buying after a pullback that she expects to occur. L3Harris is one of the defense companies most impacted by supply chain constraints, so it is not without risk.

BofA Global Research recently wrote that LHX’s management was able to provide some additional color regarding these supply chain challenges on an earnings call, highlighting that 25% of revenues are recognizable upon delivery as opposed to when costs are incurred. These hurdles, along with other macro headwinds, have amounted to a about a $250 million negative impact to FY22 revenues, BoA’s aerospace analyst Ron Epstein wrote. L3Harris has been able to offset 70% of the associated higher costs, he added.

As far as component shortages, LHX continues to feel the brunt of the impact given its position as a systems integrator, Epstein wrote. At Tactical Communications, one of the business units most impacted within the LHX portfolio, management noted that it can account for approximately 97.5% of the necessary parts on its radios.

However, without all the necessary parts, the radios cannot deliver, and the revenue cannot be recognized in some instances, Epstein explained. The company cited that out of 400 key suppliers, 10 remain on the watchlist, down from 30 in 1Q22.

“Given the persistent supply chain challenges that have shown little sign of fading, BofA  downgrading LHX to Neutral and lowering our PO to $250 from $285,” Epstein wrote.

Bargain hunters should be able to buy LHX at a reduced price from current levels as the risk of a recession causes down days in the market. Those who watch it closely can pounce when their personal risk tolerance allows them to do so.

Chart courtesy of www.stockcharts.com

Three Aerospace Investments to Purchase After Emergency of Boeing 737 MAX 9: PPA

An aerospace fund to avoid for now is iShares US Aerospace & Defense (ITA). The fund has the lowest fees among its peers, but has the worst performance compared to the other two, said Bob Carlson, a former pension fund chairman who heads the Retirement Watch investment newsletter.

ITA seeks to track the Dow Jones U.S. Select Aerospace and Defense Index but Boeing currently accounts for 18.19% of the ETF’s portfolio. A fund that he likes instead is Invesco Aerospace & Defense ETF (PPA). Like ITA, PPA is overweight toward industrials, while underweight toward technology and consumer cyclicals, said Carlson, who personally makes his own recommendations in Retirement Watch .

Chart courtesy of www.stockcharts.com

PPA recently held 52 securities and 53.2% of the fund was in its 10 largest positions. With so many holdings, the fund offers reduced risk compared to buying individual stocks. The biggest positions in the fund recently were Boeing (NYSE: BA), RTX Corp. (NYSE: RTX), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and General Electric (NYSE:GE). The fund’s currrent dividend yield is 0.7%.

PPA has the best “risk-reward profile,” compared to similar defense funds, said Connell.

Michelle Connell heads Portia Capital Management LLC.

One of the reasons that PPA outperforms its peers consistently is that it holds “reasonable weights” of each individual stock, Connell said. PPA’s weightings range from 2% to 6%, she added.

Other Aerospace Investment Opportunities Exist

A pair of proponents of national security stocks are Mark Skousen, PhD, and seasoned stock picker Jim Woods. The two-man team heads the Fast Money Alert advisory service. They already are profitable in their recent recommendation of Lockheed Martin (NYSE: LMT) in Fast Money Alert. LMT is a alternative way to invest in aerospace without the drama Boeing will be incurring in the months ahead as regulators look to identify the root cause of the in-flight emergency and require manufacturing changes to prevent any recurrence.

Mark Skousen, a scion of Ben Franklin, speaks with Paul Dykewicz.

Jim Woods, a former U.S. Army paratrooper, co-heads Fast Money Alert.

Military Demand from Wars May Help the Three Aerospace Investments to Purchase After Emergency

The U.S. military must adopt innovation to expedite technological advances, to tap into the talents of people in diverse industries and to foster collaboration with private industry and international partners to enhance effectiveness, U.S. Joint Chiefs of Staff Gen. Charles Q. Brown Jr. told attendees at a recent national security conference. Examples of the need are multiple raging wars, including those in Ukraine and the Middle East, as well as a cold one involving China and its strained relationships with Taiwan and other Asian nations.

The brutal Oct. 7 attack by Hamas on Israel triggered an ongoing war in the Middle East, coupled with Russia’s February 2022 invasion and continuing assault of neighboring Ukraine. Those unrelenting military conflicts show the fragility of peace when aggressors are willing to use any means to achieve their goals. To beat back such attacks and deter any recurrence, rapid and effective response is required.

“The Department of Defense is doing more than ever before to deter, defend, and, if necessary, defeat aggression,” Gen. Brown said at the national security conference held Nov. 16 at Johns Hopkins University.

Russia’s February 2022 invasion and sustained attacks of Ukraine has inflicted a heavy toll on both sides. Despite facing a much larger force with more military equipment, Ukraine’s resistance to the invasion is ongoing. For example, Russia’s 360-foot-long Novocherkassk war ship was damaged on Dec. 26 by a Ukrainian attack on a Black Sea port in Crimea. This video shows the ship exploding at the port when struck by aircraft-guided missiles.

Chairman Joint Chiefs of Staff Gen. Charles Q. Brown, Jr.
Photo By: Benjamin Applebaum

National security threats can require immediate action, Gen. Brown said he quickly learned since taking his post on Oct. 1.

“We may not have much warning when the next fight begins,” Gen. Brown said. “We need to be ready.”

Michael R. Bloomberg, founder of Bloomberg LP, told the John Hopkins attendees in a pre-recorded speech about the critical need for collaboration between government and industry.

“Building enduring technological advances for the U.S. military will help our service members and allies defend freedom across the globe,” Bloomberg remarked to the National Security Innovation Forum at the Johns Hopkins University Bloomberg Center.

Michael Bloomberg, philanthropist and founder of Bloomberg L.P.

The “horrific terrorist attacks” against Israel and civilians living there on Oct. 7 underscore the importance of that mission, Bloomberg added.

The three aerospace investments to purchase after the emergency of a Boeing 737 MAX 9 offer ways to divert around the financial turbulence caused by the mid-air malfunction.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Attention Holiday Gift Buyers! Consider purchasing Paul’s inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases or autographed copies! Follow Paul on Twitter @PaulDykewicz. He is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper, after writing for the Baltimore Business Journal and Crain Communications.