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Why Have Boeing Shares Stalled?

Ted Reed |Staff Reporter
Monday, 19 Mar 2012 | 11:53 AM ET
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Shouldn’t this be Boeing’s time?

The large jet manufacturer, one of just two in the world, seems to finally have its house in order. Costly development programs for the 747-8 and the 787, once characterized by multiple delays, are producing aircraft, while production of Boeing’s two most profitable aircraft, the 737 and 777, is ramping up.

The strike threat, a concern given strikes in 1995, 2005, and 2008, has given way to a five-year contract and a commitment to cooperation with the International Association of Machinists.

On the defense side, which produces half of Boeing’s revenue, there are concerns. Yet it remains difficult to imagine defense contractors are facing massive disruption, because nobody seriously anticipates that even our dysfunctional Congress would allow that.

Additionally, Boeing seems to benefit from intangibles associated with a political ascendance. The largest U.S. exporter, it is among the companies President Barack Obama has embraced as symbols of the U.S. manufacturing revival underscoring his re-election platform. CEO Jim McNerney is president of Obama’s export advisory council.

Last month, Obama visited Boeing’s widebody jet plant in Everett, Wash., to campaign and back increased financing for the Export-Import Bank, which lends money to foreign airlines that buy Boeing products. (It does not lend money to U.S. airlines that buy Boeing products, but the U.S. airline industry is politically weak, so its opposition is barely noticed.)

“The tide is turning — the tide is beginning to turn our way,” Obama proclaimed, standing in front of a 787, as workers cheered.

And yet, the turning tide has done little to lift Boeing shares. Year to date, the price for this Dow Jones Industrial Average component is flat, while the Dow industrial average is up eight percent. RBC Capital Markets analyst Rob Stallard has written that Boeing also lags the U.S. aerospace group, which is up 10 percent, and the defense sector, which is up nine percent.

BB&T analyst Carter Leake says he’s confident about Boeing’s long-term prospects, and has a “buy” rating and a target price of $92. The problems, he says, are that: “You have defense cuts hanging over you, and you have a question about the near-term profitability of the 787.”

On the defense side, Leake says, “I’d rather be Boeing than any other prime contractor — I think they can thread the needle on defense austerity.” He argues that Boeing’s F15 and F18 fighters are positioned to benefit from any cutbacks to the F35, “the poster child for defense acquisition gone wrong,” while the Chinook and the Apache helicopter platforms are best suited for the new definition of warfare, in Afghanistan and Iraq, where “we are fighting guys with guns mounted on pickup trucks, not Russians in aerial dogfights.”

In commercial aviation, Leake believes planned innovations for the 777, including a composite wing and new engines, mean the aircraft can “potentially be as game changing as the 787.”

But for the moment, questions about the 787 persist, with a stock price overhang from uncertainty about the cost of postproduction modifications to 28 of the company’s 787s and 19 of its 747-800s.

“Once we get through the logjam, it looks fine,” Leake says. “But right now the market still can't discern the ultimate cost of the postproduction work and of other delay-related expenses,” such as delay penalties for carriers such as and United Continental Holdings’ United that are getting 787s late, Leake says.

In a recent report, Stallard also explored the question of Boeing’s lagging share price.

He said investor concerns about 787 development have shifted to aircraft production, and many question the likelihood of hitting a target of 10 a month by the end of 2013. In fact, he said, some investors question whether the market can absorb the planned production increases across all aircraft types. Additionally, he said, Boeing shares gained 21 percent in the fourth quarter of 2011 on the strength of orders for the 737-MAX, so it got little benefit from orders announced during the current quarter.

In general, Stallard dismissed those concerns. “Giving the lack of fundamental basis for Boeing’s stock price underperformance year-to-date, [shares] would appear to be ripe for a catch-up move,” he wrote.

“However, a company of this size ($55 billion market cap ) might require a little bit more than just the ebbs and flows of sentiment to get it moving,” he said, noting that more orders, smooth 787 production and good quarter results should move shares toward his target of $87.

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