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Boeing's 787 Production Concerns


What is the plan to remedy the delay of the development of the 787, which will delay production?

Looking at Boeing (BA), Bloomberg shows that last month there were 6 Buy recommendations, 4 Holds and 3 sells. I've been asked why the company is being treated so harshly even as it has a huge backlog of orders.

Boeing has typically been a company where you'd buy on orders and sell on deliveries. It is facing other difficulties right now, namely the 787 development/production schedule. Investors need to remember that the 787 is the first composite commercial jet that the company has ever undertaken.

There is a lot of risk (cost) in integrating thousands of parts into a jet. So the real question investors should be asking themselves is what the cost overruns will be on the 787 program. To determine this, watch the cash flow on the commercial side. Remember when analyzing the cash flow that customers also have to pay a percentage up front before Boeing will start the production process on a new jet.

Additionally, many investors remember the late 1990's when Boeing got a ton of orders, but lost money due to manufacturing blunders. The largest of the manufacturing blunders was a much too aggressive rate change on the number of planes produced per month. This caused many suppliers to fall behind on producing parts on time, which caused a major logistics mess in the final assembly factories.

I had a front row seat to this mess. I remember seeing engines (These are high value items) laying in aisles around the factory. Mechanics were having to work insane hours to fix this logistics mess and the company paid for it on the EPS line.

Now fast forward to today. What is the plan to remedy the delay of the development of the 787, which will delay production?

Answer: Ramp up production faster than originally planned.

Investors have seen this before and why shouldn't they put a risk premium on this strategy (aggressive ramp up of production) that failed in the late 1990's? I know I would if I owned any Boeing.
No positions in stocks mentioned.

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