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BOEING INSTALLS DEFECTIVE PARTS
The Federal Aviation Administration (FAA) on Friday levied a fine of more than $3.9 million against Boeing Co. (NYSE: BA) for installing defective parts on about 133 aircraft that the company later said were ready for airworthiness certification. The company was also charged with failing properly to manage its suppliers.
Boeing reported the issue to the FAA in June, and the agency said at the time that it would issue steps the company had to follow in order to correct the problem.
The parts at issue are known as slat tracks and are used to provide additional lift on take-offs and landings. According to the FAA, the slat tracks had been weakened by a condition known as hydrogen embrittlement that affected the cadmium-titanium plating on the tracks. The FAA says Boeing knowingly submitted aircraft for the final airworthiness directive that the company knew contained the defective parts.
Last June, Boeing told the FAA that it had identified a total of 65 737 aircraft in the United States and a total of 312 worldwide that may have what it then called the “suspect” parts installed. In a statement, the FAA noted: “Although a complete failure of a leading edge slat track would not result in the loss of the aircraft, a risk remains that a failed part could lead to aircraft damage in fight.”
Boeing said that it knows of no planes currently in service equipped with the faulty part. The parts were also improperly marked with serial numbers that were either obscured or unreadable.
The company has 30 days to respond to the FAA’s proposal to fine Boeing $3.92 million for the way it handled the slat track issue.
The problem with the slat tracks is not the first time these parts have been an issue for Boeing. In 2007, a China Airlines 737 burst into flames in Okinawa shortly after 165 passengers were safely evacuated. The cause of the blast, according to the FAA report, was the failure by maintenance workers to replace a washer following a routine inspection. The loose part was pushed through the barrier between the slat track and the wing fuel tank, creating a major leak once the plane had landed. The FAA report describes in detail what happened.
In the recent case, the parts were supplied to Southwest United Industries to Spirit AeroSystems Holdings Inc. (NYSE: SPR), which then passed the parts along to Boeing. The aircraft maker then knowingly certified as airworthy approximately 133 of its 737 aircraft between August 2018 and May 2019.
Boeing has much bigger problems than a fine of less than $4 million, but one of them is building trust again among passengers that its planes are safe to fly. Boeing’s management would have to be certifiable to appeal this fine. Now’s not the time to take the company’s eye off getting the 737 Max back in the air.
Boeing’s stock traded down about 0.9% in the mid-afternoon Monday, at $350.95 in a 52-week range of $292.47 to $446.01. The stock’s 12-month price target is $376.45.
DECEMBER NEWSLETTER 1
GOAL IS SMOOTH
The fight over the Pentagon’s Joint Enterprise Defense Infrastructure (JEDI) pact is going to continue for quite some time. Amazon.com Inc. (NASDAQ: AMZN) has formally filed its complaint after the JEDI contract was awarded to Microsoft Corp. (NASDAQ: MSFT), and the continual theme in the response is that President Trump repeatedly attacked Amazon and Jeff Bezos. Some of the complaints may have some merit over when and how a final decision is ultimately made, but there may also be a disconnect from Amazon’s response and claims about how the company has rapidly changed the landscape for many sectors in America.
24/7 Wall St. has been pulling reports about “opinions” and “predictions” over how the ultimate decision will go. Our own research and industry discussions have revolved around Microsoft being less likely to be in regulatory issues ahead and also that security is an issue that was favoring Azure over Amazon Web Services. That said, it’s just going to be a long time before any final decision is made and we are leaving the opinions and views to the outsiders at this time.
The first take is simple, yet complicated. Major media reports have been biased for long enough (for and against) about anything related to politics that we need to hear from people who are willing to stock their necks out predicting the financial aspects. This second group pertains to Wall Streeters who don’t care as much about the political jabbering as much as they do predicting the actual outcome.
The redacted complaint was shown to be in excess of 100 pages, so it is likely that more opinions on this JEDI-challenge will be announced in the coming days and in the weeks ahead as more information is parsed out. Amazon has asked the Department of Defense to terminate the award to Microsoft award and to conduct a new review of the proposals from each company. Amazon has alleged that President Trump launched behind-the-scenes attacks against it.
Wedbush’s Daniel Ives called the Microsoft a major black eye for Bezos and Amazon and the award is still likely to go in favor of Microsoft regardless of the challenge. Ives noted that the claim is that AWS lost the JEDI contract due to President Trump’s repeated public and private attacks against Amazon and Jeff Bezos. He pointed out:
The question is whether the President of the United States should be allowed to use the budget of DoD to pursue his own personal and political ends,” the filing states. “DoD’s substantial and pervasive errors are hard to understand and impossible to assess separate and apart from the President’s repeatedly expressed determination to, in the words of the President himself, ‘screw Amazon.’ Basic justice requires re-evaluation of proposals and a new award decision.
While the protest will cause noise and delay the official start of the JEDI award, Ives believes that Microsoft will still ultimately win the $10 billion contract. He also called it a game-changer for Microsoft and a black eye for Bezos and AWS for who will win in the battle for the next $1 trillion of cloud spending over the next decade. Ives retained his Outperform rating on Microsoft and said:
With roughly 32% of workloads in the cloud today and poised to hit 55% by 2022, we believe Nadella & Co. are in the catbirds seat to get more of these complex workloads (e.g., AI, machine learning, etc.) as more enterprises take the leap to a hybrid cloud architecture over the coming years. While Amazon will continue to fight this issue in “JEDIgate” and possibly drag out the inevitable start of JEDI we ultimately believe this is a paradigm changer for Microsoft who will remain the lone winner in this hard fought technology/K Street battle that took place over the last year and remains a stinging defeat for Amazon and Bezos.
The independent research firm Argus also recently reiterated its Outperform rating on Microsoft and its $173 price target. The firm noted that Azure is still #2 behind AWS but that Microsoft has advantages in competing against AWS for new contract wins ahead. The Argus report from November 27 said:
Management believes that the company has a number of competitive advantages in this area. It does not compete with the clients of Microsoft Azure, the company’s cloud solution, in those clients’ core businesses – in contrast to cloud rival Amazon. Also,Microsoft has an integrated software stack that addresses client needs across the enterprise IT landscape from cloud to security to employee collaboration… Given Microsoft’s massive commercial user base and long-term relationships, we believe that the company is well positioned to grow commercial revenue as the process of enterprise digital transformation accelerates, both in the U.S. and internationally.
Merrill Lynch has Buy ratings on both Amazon and Microsoft and the firm’s Justin Post has not yet assigned any forecasting or predictions around whether AWS or Azure will prevail. That said, the Amazon.com price objective of 2,160 on Amazon implies upside of about 23% from the current share price. The Microsoft price objective of $162 implies just over 7% upside before considering Microsoft’s 1.3% dividend yield.
Stifel’s Brad Reback most recently had a Buy rating on Microsoft along with a $160 target price. While he has yet to offer any formal updates around the outlook, Reback believes that Microsoft’s business could be dominated by the cloud by 2023 on top of Azure’s current $17 billion run rate for this year.
Reback believes the total cloud opportunity is only about 10% penetration so far. Other recent wins for Microsoft have been from the likes of Allianz, AT&T, BMW, Campbell, Columbia Sportswear, Gap,, Nuance, Kroger, Salesforce.com, Sony, Walt Disney and others. With Azure running at $12.4 billion per year as of June 2019, that is expected to run at $26.7 billion by 2021, $35.2 billion by 2022 and even over $90 billion by 2030.
Again, more opinions and views are likely to be shares in the coming days and weeks as more information and data come available. Even then, it could be months (if not longer) before the absolute final victor is named.