Do Boeing Investors Have Their Heads in the Sand?

Ted Reed - The Street  FEB 06, 2013 2:40 PM

Amazingly, Boeing's share price is virtually unchanged from its opening price of $76.21 on Jan. 15, the day before the FAA grounded the 787.

 


The Boeing (NYSE:BA) 787 has been grounded for three weeks -- investigators still can't find a cause for its two lithium-ion battery fires -- and on Tuesday, All Nippon Airlines, the biggest 787 operator with 16 aircraft in its fleet, seemed to throw up its hands as it announced that starting in March it will serve a new selection of premium tea and sake on its international flight.

Boeing investors don't seem all that worried. On Tuesday, Boeing shares closed at $75.89, up about 1% from the previous day's close. At mid-morning Wednesday, shares were trading at $75.83, down $0.06.

Amazingly, Boeing's share price is virtually unchanged from its opening price of $76.21 on January 15, the day before the Federal Aviation Administration grounded the 787 airplane.

Another amazing fact is that during the Boeing earnings call on January 30, the company said it would deliver 60 of the planes this year; boost 787-8 production to 10 per month by the end of the year; begin production of a newer, bigger model, the 787-9; and review the outlook for the 787-10.

At times in its history, Boeing has been well-served by its ambition and confidence. But there is a case to be made that the 787 program is not, at this moment, a place where investors should retain their confidence.

"We believe the disruptive effect on Boeing's commercial aircraft business over the next 12-18 months is going to be far greater than the market is currently assuming," wrote BB&T Capital Markets analyst Carter Leake, in a report issued Monday.

Leake, a longtime Boeing booster, downgraded shares to hold from buy on January 7 and to underweight from hold on January 17. "We have complete confidence in Boeing's ability to ultimately rectify any problems, but neither we, nor anyone on the street, has any idea as to complexity, cost and impact of any such fix," Leake wrote at that time.

In his report on Monday, Leake reiterated his view that the share price faces long-term obstacles. "We remind investors that just having the 787 fly again moves us from 'disaster mode' to 'caution mode' as any smoke incident after an un-grounding will almost certainly elicit capitulation selling," he wrote.

As for Boeing's earnings day optimism, Leake wrote: "Other than the large overhang of the 787 grounding, this quarter's strong operating performance (both cash and EPS) would likely have marked a turning point for Boeing as it seemed to us the 787 was finally on a clear path to cash break even.

"But we are reminded of the old saying, "Other than that Mrs. Lincoln, how was the play?" when discussing any non-787 related positive trends," Leake wrote. "Nothing else matters until Boeing can prove that the 787 will be delivering again in short order.

"Investors should understand that Boeing's decision to forge ahead with its original production rate plans is borne out of necessity, for if Boeing is ultimately forced to slow 787 production, the aggressive learning curve assumptions used to achieve the lofty free cash flow projections in current estimates would certainly not be achieved," he said.

Of course, in discussing the 787 program meltdown, it is necessary to recall two other aircraft -- the 737 and 777-- and to remember that Boeing is really two companies: Good Boeing builds two of the most successful airplanes in the world while bad Boeing experiments with the 787.

Ultimately, for investors, the question remains what it has been for years: Can good Boeing's continued success overcome bad Boeing's excessive experimentation?

On January 29, Boeing said it had begun assembly of the first 737 to be built at the rate of 38 airplanes per month, part of its previously announced effort to boost production from 31.5 aircraft per month two years ago to 42 aircraft per month in 2014.

On Febuary 2, the Nikkei newspaper reported that ANA is in talks with Boeing to speed up delivery of three 777 aircraft that had been scheduled for delivery later this year.