Now that the 40-month saga of Boeing’s (NYSE:BA) 787 Dreamliner is over, investors might want to take a new look at its stock.
The wait finally ended Friday when the Chicago-based company received final approval for the cutting-edge aircraft from U.S. and European regulators. Japan’s All Nippon Airways is due to receive the first Dreamliner in September. The company’s timing, though obviously not planned, is good.
Prices for jet fuel are up 43% year-over-year, though they have started to come down recently as the crude market declined. These high fuel prices might encourage more airlines, many of which continue to struggle financially, to purchase the Dreamliner because it could cut fuel costs by up to 20%. That figure might be too tempting to ignore — the International Air Transport Association expects the industry to post a profit of $4 billion for 2011, down 78% from a year earlier.
“The 787’s best friend is a real lack of real competition,” said Richard Aboulafia, an analyst with the aviation consultancy Teal Group, in an interview.
Meanwhile, rival Airbus SAS has been dealing with problems of its own concerning its new A350 wide-body. In June, the European aerospace firm said it would delay delivery of two A350 models. “It is the third time Airbus has made major changes to its A350 plan since it first tried to determine how to tackle Boeing’s 787,” Aviation Week reported.
Shares of Boeing have barely budged during the past year as investors grew weary regarding the seemingly endless delays of the launch of the ultra-modern Dreamliner, which will carry between 210 and 290 passengers, depending on the model. Shares rose $1.70, or 2.78%, to $62.80 in Friday trading. Wall Street analysts have an average price target of $90 on Boeing.
Boeing’s shares are cheap, trading at a price-to-earnings multiple of 13.3, which is below the average P/E of 16 of the S&P 500. The stock is worth picking up because its customers were willing to put up with the seemingly endless delays associated with the Dreamliner. In fact, more than 800 are on order.
However, there are downsides to consider.
First, Boeing’s defense business is under pressure as the Pentagon’s budget continues to get squeezed. Boeing’s Defense, Space & Security division posted revenue of $7.69 billion in the second quarter, up 4% from a year earlier. Revenue from Boeing’s Commercial Aircraft division rose 19% to $8.84 billion.
Then there is the leadership of CEO W. James McNerney. The executive, who came to Boeing in 2005, has come under fire by some pundits because the Dreamliner delays happened under his watch. Moreover, his 2010 compensation of $13.77 million included a cash bonus of more than $4 million, which given the Dreamliner delays seems difficult to justify.
“Boeing was one among the 20% of S&P 500 companies registering a ‘High Concern’ this proxy season on our Executive Scorecards, which rate companies on the strength of compensation policy,” Greg Ruel of GMI Ratings wrote in an email. “Boeing failed 7 of our 10 compensation policy stress tests.”
Last year, the Dreamliner was delayed after it was discovered that parts in the tail were improperly installed. Boeing also had to tell suppliers to quit delivering parts to its plant, saying “some manufacturers were having trouble getting components and some needed to finish engineering and design changes Boeing wanted,” the Associated Press reported.
To make matters worse, the Dreamliner also has become a political football. The National Labor Relations Board has attacked the aerospace firm for allegedly shifting work illegally on the new aircraft from union plants in Washington state to nonunion ones in South Carolina. The case could continue to loom over Boeing because of its political charge.
For now, however, the risks associated with Boeing are outweighed by the rewards.
Jonathan Berr does not own shares of the companies listed. Follow him on Twitter at @jdberr.
