Looking Past 787 Production Schedule Changes

Boeing is blessed right now with the perfect circumstances for doing business, according to several financial analysts. Low interest rates and a hot global economy are good for business, and with the exception of a credit squeeze everything should be ideal for selling aircraft.

As for the competition, Boeing has only one significant rival... one which appears hapless lately.

Airbus, a combination of businesses owned by European Aeronautic Defense and Space, was sluggish delivering its A380 superjumbo jet -- it can hold more than 800 passengers -- to customers, reports The New York Times. Those issues were smoothed out, but Airbus has been held back by other factors, together with spikes in costs. That works to Boeing’s advantage, even the value of the dollar to the euro.

Airbus troubles are apparent in the stock of EADS. It has plummeted down roughly 20 percent over the last two years, despite exchange rates the euro share would be worth roughly the same number of dollars today.

Boeing stock has risen 35 percent in the same period, but was higher until recently. Shares have seen a drop of 10 percent since the company reported logistical problems of its own in October.

Various foreign suppliers of components for the 787, the next-generation jet which Boeing is counting on for growth, have not been able to meet deadlines, thus threatening the company’s timetable for delivering the jet.

Boeing’s strategy is to condense production time once the flow of parts from supplier’s increases. That would mean delivering far fewer planes than promised next year or in 2009.

Boeing stock failed to recover from a dip last month suggesting that investors have little confidence in the new delivery schedule. The greatest of their concerns seem to be the plan calls for an increase in production even before the aircraft obtains certification.

The current plan could increase the risk of more delays and greater expense if problems are discovered that require the 787 to be reworked, said Joseph B. Nadol III, an analyst at JPMorgan.

Nadol rates the stock as neutral, a step up from the underweight evaluation he had for much of the last two years.

The revised 787 plan raised eyebrows even among Boeing bulls. Joseph P. Campbell, an analyst at Lehman Brothers, has an overweight rating and a $112 price target on the stock, even as he foresees $1 billion in added costs from the 787 glitches and wonders how the new timetable can be met. Campbell remains a fan of the stock because he regards the production stumbles as only a temporary setback.

"We expect Boeing will have a very hard time staying both on schedule and on budget for the 787, but both may still be possible," he wrote in a research report. "Even so, we do not expect Boeing’s 787 program will miss in ways that are so important relative to the expected financial results that the share price performance will be negatively affected for extended periods."

Richard Tortoriello, an analyst for Standard & Poor’s Equity Research, agrees. It may take a while getting into the air, but the 787 will be a terrific plane, he said.

"It’s more fuel-efficient and cheaper for airlines, and it seems to be the right size, too," Tortoriello said. "That’s one reason Boeing is selling so many of them. It’s a midsize plane that has a good range and can get into and out of a lot of airports."

By focusing on the 787 and not the production delays, some analysts speculate the Boeing stock will value at $118.

"I don’t see it as a huge problem," Tortoriello said of the production trouble. "If they overcome it successfully, they should have a great, profitable program going forward. I think the stock price reflects a good dose of worry right now over the 787, and that’s where I see opportunity."

FMI: www.boeing.com