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Assessment of Boeing

More than 60 nations and airlines around the world have grounded the Boeing 737 Max 8 jet, the aircraft model that was involved in the crash of Ethiopian Airlines Flight 302. This is the second fatal crash involving Boeing’s 737 Max 8 jet in the past six months. A Lion Air jet out of Jakarta, Indonesia crashed in late October.

John Eade, President and Director of Portfolio Strategies with Argus Research,, a leading independent Wall Street research firm gives his analysis of Boeing.

Boeing (NYSE: BA) released a statement expressing condolences to the families involved and is sending a technical team to provide assistance under the direction of the Ethiopia Accident Investigation Bureau and the U.S. National Transportation Safety Board.

The 737 Max 8 jet is a major sales driver for Boeing. Last year, the company delivered 806 planes, more than 70% of which were 737s. The list price for the 737 Max 8 jet is around $120 million. There are more than 5,000 of them on order, representing about 85% of the company’s seven-year backlog.

Boeing is going to have to manage several issues in order to move forward and continue its growth record.

Investigators will first have to determine the cause of the crashes. The cause of the first crash has not been definitively determined, but investigators believe it may involve new automatic controls for a new engine that hadn’t been fully explained to pilots. In the months since that crash, Boeing has provided airlines with additional training. The second crash may have been caused by the same problem, or it may have been a different system malfunction or even pilot error.

Boeing will also have to convince its customers to maintain and increase their orders. The main competition for the 737 Max is Airbus’ A320, which also scores high in fuel efficiency. Both of these planes are important cogs in air travel today, providing service on short- and medium-haul routes. The industry is very healthy. Global passenger traffic has been growing at a 6% rate, above the 10-year average of 5.5%.

Investors in the BA shares have faced this kind of risk before. The BA shares fell 19% after the Lion Air crash, before soaring 38% to all-time highs of $440 earlier this month. The Lion Air disaster did not have an impact on 4Q EPS, as sales rose 14% and operating earnings climbed 49%. The $100 billion revenue company has the resources to make necessary modifications. The key will be to correct the problem before another disaster strikes.

Argus Research maintains a “Buy” rating on Boeing with a target price of $460.

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