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

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

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

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

Boeing is truckle to 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 Typically. But Boeing’s climb stopped when tragedy struck, twice: Just several months apart, two Boeing 737 Max airplanes toppled, killing a total of 346 people.

Federal regulators grounded the 737 Max – there were 387 in service surrounding 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 enmeshed 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 distinguished CNBC.

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

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

Both crises show how perception of management’s competency, as well as rebuilding customer trust, 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 make up 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 on the dot 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 group media, those are the type of things that come back to haunt you,” Hottovy said.

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

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

Ryanair CEO Michael O’Leary aired his frustration during a conference call with investors last week, articulating 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 move crash, multiple federal investigations began examining the 737 Max – including probes by the FBI and both chambers of Congress. Investigators are first of all 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 genres of crash victims.

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

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

Boeing parts haven’t fallen to the degree that Chipotle did during its crisis, even though Boeing’s crashes were multitudinous severe. With its timeline for resuming flying the 737 Max this year in doubt, it’s unclear how patient shareholders longing 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 hairy situation,” Jefferies analyst Sheila Kahyaoglu told CNBC. “Whether it’s November or January I don’t think will correct much of a material difference.”

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

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

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 tipsy 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 sort on having fresh products. The way Chipotle handled the food scares, in a lot of ways, exacerbated the issue – management was complacent,” Hottovy bring to light

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

“Customers were willing to cool ones heels 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 truly that they didn’t do a great job of training their employees,” Hottovy said. “It didn’t necessarily lead to the comestibles safety issues, but it certainly didn’t help it either.”

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

While there are much in evidence differences between the companies and the products at hand, analysts pointed to how the situations have multiple similarities. First and leading, 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 gismos? How long is it going to take consumers to feel comfortable to get back on a 737? That’s an open question,” Epstein estimated.

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

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

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

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

“If there’s a third event, 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 weighted.

Another similarity between Boeing and Chipotle is that both companies had an issue with a key product. Epstein famed that Boeing is not going to “move out of the 737 business” and that what happened is fixable. But Epstein said indeed “the absolute worst possible case” for Boeing, where the airplane is endlessly grounded and “never comes back,” purposefulness 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 – dialect mayhap 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 boodle, but then they’ll have another airplane in the market and they’ll be selling those,” Epstein said.

Moving forward, Boeing’s management cannot be lackluster in its response and future communication about the 737 Max, Hottovy said. Chipotle “was an illustration of what not to do” during a crisis, Hottovy said, and management’s clarity “was severely lacking.” For both companies, Hottovy declared 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 take a situation like this nowadays, you have to be fully transparent: You have to identify what happened, why it happened in the firstly place and what solutions are going to be there,” Hottovy said. “Chipotle was never able to concretely say that a bad quantity of lettuce got into the system.”

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

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

More broadly, the type of airplane a consumer is mad on rarely factors into their choice. But with Chipotle, the type of food is absolutely key. “It’s less confused,” 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 journeys ends, not aircraft.

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

The market demand for the establishment’s product during the crisis is also different. Chipotle has already seen some sales declines when the eatables safety issues arose, Hottovy said. But at the time of Boeing’s crisis, the company was reporting record sales and a backlog of multifarious 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 powder-rooms all around the country.

Perhaps the most important difference is the management situation. Chipotle waited until after the decay 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 persuade for that: Airbus.

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

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

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

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

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

He speculated that the 737 Max’s deliveries may mean Boeing replaces it sooner than expected but said that’s one of “a lot of question that even they don’t require 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 Confirm 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 peaked out that the event was before a new issue with the 737 Max arose, Kahyaoglu thought potential customers seemed unfazed by Boeing’s discharges: “It was like the Max wasn’t even grounded,” she added.