Investor Patience Is Key When Bad News Happens (DLPR’s Vogel discusses Boeing)
Recent history of companies in crisis shows the virtue of patience when it comes to Boeing and others.
By Lou Carlozo, Contributor April 16, 2019, at 9:55 a.m.
EVERY CLICHÉ YOU CAN come up with that links aviation and investment applies these days to Boeing Co. (ticker: BA). To wit: This stock, flying for the first two months of 2019, was cleared for takeoff by Wall Street analyst firms that universally adored it. Then came turbulence in the wake of two tragic crashes of the company’s 737 MAX jetliners and ever since, Boeing has lost altitude: down 16 percent since March 1.
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Now the oxygen masks have dropped, as last week Bank of America lowered Boeing from a “buy” to a “hold” and American Airlines Group (AAL) cut 5,000 flights of the 737 MAX – even as market watchers forecast that the overall debacle would impact Boeing’s earnings for the second quarter.
Even Southwest Airlines Co. (LUV) has changed course, with one analyst firm downgrading it to a “hold” since the company has 34 MAX jets in its fleet. No matter that Boeing is crowing about the 96 successful test flights it’s completed since programming a software fix for the plane: So far, Wall Street isn’t impressed.
Can Boeing bounce back? “Of course,” says Tom Vogel, senior vice president of Dukas Linden Public Relations, who recently launched the firm’s crisis communications practice. “The question is how long will that take and how much will it cost, and not just in terms of revenue or the price of its stock.”
To that extent, investor perception and even analyst perception now fly in solid formation with public perception – which as of this moment, is terrible.
“While Boeing may have been widely perceived as a ‘good company’ before, that isn’t the case now, which is a measure of just how serious a crisis it faces,” Vogel says. “Their challenge goes far beyond fixing the 737 MAX, to the credibility of its management. Investors are wondering if there’s another shoe to drop and travelers, who are its ultimate clients, are rightfully skeptical about anything the company says now.”
“Perception is reality: It matters whether investors think a company is great,” says Eric H. Kessler, the Henry George Professor of Management at Pace University’s Lubin School of Business. And that’s potentially worse news on top of Boeing’s bad news, since spooked investors have a knack for fanning flames before the executive suite can put out the fire.
“Investors make systematic, predictable errors when making such judgments,” Kessler says. “For example, and potentially relevant to this case, people typically put too much weight on recent, colorful information – like crashes – that easily come to mind.” And let’s face it, air disaster stories tend to make for a more compelling read than the fine print in the quarterly report about earnings before interest, tax, depreciation and amortization.
“So even if the fundamentals are sound there still might be irrational overreactions due to the prevalence of this mental shortcut,” Kessler says.
Speaking of mental shortcuts, even financial advisors acknowledge the need to avoid any rush to judgment – or flights of fancy, if you prefer.
“The notion that I or any financial advisor can give meaningful advice about how Boeing will emerge from this is a myth,” says J.R. Robinson, owner and founder at Financial Planning Hawaii in Honolulu. “Per the Efficient Market Hypothesis, all known information and future expectations about Boeing’s outlook are already factored into the market price. It is impossible for anyone – even active portfolio managers – to outguess the market.”
That established, investors are right to question whether the 737 MAX debacle is more than just an isolated trouble spot. Not all that long ago – 2015 to be precise – it was laughable to suggest that Wells Fargo & Co. (WFC) could fall from its perch as a financial services kingpin. Worth $306 billion, it was the world’s most valuable bank and swimming in black ink of another kind: a sea of gushing press attention.
That was, of course, before a massive cross-sell scandal sent Wells Fargo spiraling into a black hole of bad news in 2016. The more reporters and regulators dug, the more they found wrong with the company that has since seen one CEO forced out and his successor announce his early retirement. Restricted by federal authorities from growing, the bank has seen its market cap shrink to roughly $217 billion – while its stock, priced at $48 per share, is down more than 3 percent from when news of the original scandal reached critical mass.
Yet today’s worried Boeing investors will want to note how another company beset by horrible news in 2016 – Samsung – managed to get back on track.
It’s incredible to look back and realize that 40 bucks (the price of a Samsung Galaxy Note battery) turned into a headache worth $5.3 billion (the cost of the Samsung Galaxy Note 7 recall). Not only had the Korean electronics giant lost a pitched market battle with Apple (AAPL) and its iPhone 7; it also faced stinging rebukes over product safety when its gadgets went up in flames.
To make matters worse, Samsung executives showed gross ineptitude in handling the crisis. Things got so bad that Note 7 users were encouraged to return their phones in fireproof boxes, just the kind of thing everyone keeps in their filing cabinet.
Yet since 2017, it’s the stock that’s been on fire, rising 30 percent on South Korea’s stock exchange. And in terms of smartphone innovation, Apple has fallen into an iRut that must have Steve Jobs swearing one of his famous blue streaks in his grave – while Samsung is offering its revolutionary foldable model, the Galaxy Fold, for pre-sale this month.
Of course, Apple and Samsung have plenty of competition in the smartphone market, while Boeing has only one competitor to deal with.
“The airline manufacturing industry is essentially a duopoly with a staggering 99 percent of global large plane orders from Boeing and Airbus,” says Bob Johnson, a finance professor at Creighton University’s Heider College of Business. “These orders are virtually split between the two giants. The reason is simple: Airline manufacturing is expensive and there are enormous barriers to entry.”
This article originally appeared in US News & World Report.