Why Boeing investors can look to Chipotle as a path through its crisis and back to big stock returns

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Patrick T. Fallon | Bloomberg | Getty Images; Lindsey Wasson | Reuters

Boeing investors face more questions than answers as its 737 Max crisis drags on, but the company could find a way forward by turning to an unlikely example: Chipotle Mexican Grill.

Chipotle shares were on an incredible run from the company’s IPO to mid-2015, climbing more than 1,400%, but in July of that year an E. coli outbreak sickened hundreds of customers.

Sales plunged and then came more E. coli outbreaks, plus norovirus and salmonella outbreaks, that further deteriorated public confidence. It took more than three years before Chipotle’s stock stopped falling — even after the company eventually quelled safety concerns. At the bottom, its shares lost about two-thirds of their value.

Boeing is playing out a similar story. Over a decade, its shares rose more than 700%. It was one of the best-performing stocks in the Dow Jones Industrial Average. But Boeing’s climb stopped when tragedy struck, twice: Just several months apart, two Boeing 737 Max airplanes crashed, killing a total of 346 people.

Federal regulators grounded the 737 Max – there were 387 in service around the world. Boeing slowed production of the jets and continues working with regulators to find a fix for the aircraft’s software, which has been implicated in the crashes. Its stock has lost about a quarter of its value since its most recent high.

“Airplanes are not lettuce,” Bank of America analyst Ron Epstein told CNBC.

Indeed, at a glance these two companies are vastly different, yet a comparison of their crises reveals noted similarities that should give Boeing investors a better sense of how long the recovery process may take.

“From the point of view that lettuce is a core piece of what Chipotle does, the 737 is a core piece of what Boeing does – about a third of their cash flow,” Epstein said.

Both crises show how perception of management’s competency, as well as rebuilding customer confidence, is key to a successful recovery.

“It’s amazing that we’re talking about two very different companies and two very different situations, but I do think that at the root of it is this: If management comes across as complacent, it can have a more serious ripple effect than in any time in history,” Morningstar consumer analyst R.J. Hottovy told CNBC.

“You can’t come across as if it’s no big deal because, in this day and age of social media, those are the type of things that come back to haunt you,” Hottovy said.

The Boeing crisis

Boeing reported its biggest quarterly loss in history last month, which was its first full three-month period since the 737 Max was grounded. The company’s chairman, president and CEO, Dennis Muilenburg, spoke on the company’s conference call with investors about strategies and alternatives, although he spent much of the time tempering expectations.

Costs are piling up as Boeing took a nearly $5 billion charge in the second quarter to compensate airlines for disruptions caused by the grounded plane. Airlines have canceled thousands of flights already this summer, with Southwest Airlines warning passengers that disruptions may continue through the Thanksgiving and Christmas holidays.

Ryanair CEO Michael O’Leary aired his frustration during a conference call with investors last week, saying new planes for the airline “could well move to zero if Boeing don’t get their s— together pretty quickly with the regulator. “

After the second crash, multiple federal investigations began examining the 737 Max – including probes by the FBI and both chambers of Congress. Investigators are especially looking at how regulators approved the 737 Max to fly as a software issue appears to be key in both crashes. Additionally, Boeing faces lawsuits from the families of crash victims.

Shortly after the grounding, Boeing cut production of the 737 Max to 42 aircraft per month, a decrease of about 20%. While Boeing aims to get back on track and raise production next year, that is contingent upon the aircraft returning to service before the end of this year. If delays worsen, Boeing may either further cut or suspend production. Either move would damage Boeing’s suppliers, such as Spirit AeroSystems and General Electric, both of which are seeing profits squeezed by the slowing production.

Boeing shares have fallen nearly 25% since peaking on March 1 at $446.01 a share. At about $340 a share, Boeing’s stock is currently near the same price it was 12 months ago.

Boeing shares haven’t fallen to the degree that Chipotle did during its crisis, even though Boeing’s crashes were more severe. With its timeline for resuming flying the 737 Max this year in doubt, it’s unclear how patient shareholders will have to be.

“It’s a timer on how quickly this aircraft gets off the ground. But there’s a lot that goes into it, so it’s a very sticky situation,” Jefferies analyst Sheila Kahyaoglu told CNBC. “Whether it’s November or January I don’t think will make much of a material difference.”

So far, Boeing’s stock is treading water near the same price it was at this time last year. But the question Epstein asks is what many want answered: “Where is the stock when you get through this?”

“Given the headlines, the stock’s been very resilient,” Epstein said.

Chipotle recovers from its crisis

It took about four years, and a new CEO, but Chipotle’s stock has come all the way back. The shares dropped nearly 67% from their high of $757.77 in August 2015 to the bottom, at $251.33 in February 2018. How did the company lose nearly two-thirds of its value?

“Chipotle had built its brand on having fresh products. The way Chipotle handled the food scares, in a lot of ways, exacerbated the issue – management was complacent,” Hottovy said

He believes Chipotle’s multiple food scares compounded issues with its operations.

“Customers were willing to wait in the long line out the door because they knew the line would be fast, and the speed of service got slower, and a lot of that was the fact that they didn’t do a great job of training their employees,” Hottovy said. “It didn’t necessarily lead to the food safety issues, but it certainly didn’t help it either.”

Shares began to turn around after Brian Niccol, former Taco Bell CEO, came on as Chipotle’s chief executive in March 2018. Founder Steve Ells resigned from the position but remains executive chairman. Chipotle is up 89% this year and hit a new 52-week high of $822.88 a share on Friday.

The similarities for Boeing shareholders

While there are obvious differences between the companies and the products at hand, analysts pointed to how the situations have multiple similarities. First and foremost, Epstein said, is the company’s reputation with consumers.

“How long did it take for people to feel comfortable to go back into Chipotle and eat things? How long is it going to take consumers to feel comfortable to get back on a 737? That’s an open question,” Epstein said.

Hottovy explains that, in the restaurant and fast-food business, a food scare typically has “a recovery period of about nine months.” Chipotle’s recovery took longer because “they had multiple incidents,” Hottovy said, which “showed that whatever solutions they had put into place just weren’t working.”

“If you have repeated ones then that starts to become part of the brand,” Hottovy said.

Kahyaoglu said that the 737 Max “won’t be a major factor in flight choices” after about “the first six months, or even three months.” She cautioned that this is only her own rough estimate, and not a direct result of a model or survey. Both companies had more than one incident but Boeing’s recovery time, in her view, will not be quite as drawn out due to the difference in consumer choices.

Epstein, however, added that Boeing, like Chipotle, faces “an existential risk that wasn’t there” before: The potential damage to customer confidence from further accidents.

“If there’s a third incident, for any reason – it could even not be the fault of the airplane – then that would put a big dent in the 737 franchise,” Epstein said.

Another similarity between Boeing and Chipotle is that both companies had an issue with a key product. Epstein noted that Boeing is not going to “move out of the 737 business” and that what happened is fixable. But Epstein said even “the absolute worst possible case” for Boeing, where the airplane is endlessly grounded and “never comes back,” will not change the market demand for an airplane like the 737 Max.

“They’ll replace it with a new airplane. It takes three or four years – maybe five years – they come out with a whole new product with all the bells and whistles of a new airplane, it costs them a lot of money, but then they’ll have another airplane in the market and they’ll be selling those,” Epstein said.

Important differences

Moving forward, Boeing’s management cannot be lackluster in its response and future communication about the 737 Max, Hottovy said. Chipotle “was an example of what not to do” during a crisis, Hottovy said, and management’s clarity “was severely lacking.” For both companies, Hottovy said that “transparency is a big part of this.”

“One of the big reasons why Chipotle wasn’t able to fully recover is that, when you have a situation like this nowadays, you have to be fully transparent: You have to identify what happened, why it happened in the first place and what solutions are going to be there,” Hottovy said. “Chipotle was never able to concretely say that a bad batch of lettuce got into the system.”

Kahyaoglu notes that Boeing has some opportunities to recover that Chipotle did not have.

“Perhaps with some rebranding, the general public might not be able to distinguish the Max [compared to another Boeing aircraft], where as a consumer walks into a restaurant and makes a very conscious choice,” Kahyaoglu said.

More broadly, the type of airplane a consumer is flying on rarely factors into their choice. But with Chipotle, the type of food is absolutely key. “It’s less complicated,” Epstein said. “You’re either going to get a burrito or you’re not going to get a burrito.”

With flights, most customers choose times and destinations, not aircraft.

“The consumer ultimately won’t need to make this decision and, once this aircraft is back and there are 100 safe flights, then no one will ever be talking about this again,” Kahyaoglu said.

The market demand for the company’s product during the crisis is also different. Chipotle has already seen some sales declines when the food safety issues arose, Hottovy said. But at the time of Boeing’s crisis, the company was reporting record sales and a backlog of more than $400 billion worth of orders.

Boeing also has a lot of inventory built up, Epstein noted, as the company has been parking 737 Max airplanes at facilities all around the country.

Perhaps the most important difference is the management situation. Chipotle waited until after the worst of the crisis to change its CEO, but analysts don’t expect that Boeing’s board is likely to remove Muilenburg. There’s a simple reason for that: Airbus.

“This a global duopoly with two manufacturers … there aren’t a wealth of people that Boeing could choose to put aside from their main competitor,” Kahyaoglu said.

Epstein concurred. “Right now, for better or for worse, there are only two large manufacturers of commercial aircraft in the world.”

“Who else could you possibly hire?” Kahyaoglu added. “That’s why I think Muilenburg’s knowledge of the situation is actually pretty important, given his operational experience and knowledge of Boeing.”

What’s ahead for Boeing?

Boeing shareholders will have to remain patient until investigators and regulators come to a final decision. Epstein reiterated his point about why even the “highly improbable case” that Boeing has to replace the 737 Max will not severely damage the company.

“Even under that case they’ll still be one of the two global airplane suppliers and they’ll have a new product in the market that will probably be pretty darn good,” Epstein said.

He speculated that the 737 Max’s issues may mean Boeing replaces it sooner than expected but said that’s one of “a lot of question that even they don’t have the answers to right now.”

But thus far, the situation is not as ugly for Boeing investors as it was for backers of Chipotle.

Kahyaoglu attended the Paris Air Show in June, one of the biggest aerospace gatherings in the world, and one of the key places where Boeing and Airbus sign deals. Although she pointed out that the event was before a new issue with the 737 Max arose, Kahyaoglu thought potential customers seemed unfazed by Boeing’s issues: “It was like the Max wasn’t even grounded,” she added.

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