The Boeing (BA) 787 ‘Dreamliner’ seems to have become the stuff of nightmares for the aerospace company’s investors. An emergency landing of yet another Dreamliner in Japan earlier this week, combined with earlier problems, has prompted both the Federal Aviation Administration and its European counterpart to order that all future flights be grounded until they can determine the ‘airworthiness’ of the fleets owned by airlines like United (UAL), Air India, Lan Chile and others. Needless to say, that has sent Boeing’s stock into a decline again, as seen in a stock chart, after it had recovered some altitude in prior trading sessions after the initial reports of battery problems surfaced.
Boeing had almost certainly hoped that problems were at an end with the Dreamliner, whose official debut was postponed no fewer than seven times between 2007 and the date in September 2011 when the first jet featuring an array of carbon-fiber reinforced plastic materials finally rolled off the production line for Japanese airline ANA. Ironically, it was an ANA 787 whose emergency landing triggered the regulatory decision. Odds are that it will take time for Boeing to prove to regulators’ satisfaction that its lithium ion batteries pose no hazards, in spite of two recent fires. But even though Boeing is reported to be moving aggressively to satisfy them, proposing an array of interim changes and safety checks, the crisis creates a challenge for investors. Is the blow to Boeing’s reputation severe enough to derail what had increasingly been appearing to be an appealing investment opportunity?
Admittedly, the Dreamliner was a big part of Boeing’s appeal. While U.S. military spending was falling, Boeing was racking up orders for the Dreamliner at a more rapid pace than archrival Airbus. By the end of the third quarter of 2012, Boeing had captured about 879 orders for new aircraft to 382 for Airbus’s own new model and racked up a backlog amounting to seven years’ worth of orders.
Analysts had been becoming more bullish on the company’s business outlook and its profits, and not without reason. Even though Boeing’s third-quarter results fell short of expectations, thanks in part to pension fund expenses, the company boosted its earnings guidance for the full year of 2012, predicting it would capture earnings of as much as $4.95 a share on revenue of as much as $82 billion, up from earlier projections of $4.60 a share and $81.5 billion, respectively.
One of the other attractions is Boeing’s relatively robust cash position and its willingness to pay out that cash in the form of dividends; analysts have pointed to the fact that its actual payout ratio – the percentage of earnings dedicated to dividends – is about 30%, meaning there is plenty of room for it to climb higher. Even with the stock down a bit, the dividend yield is only about 2.5%. The company also had signaled it would begin a buyback program this year. As for the non-Dreamliner business, well, even if US military spending is faltering, demand from countries like Saudi Arabia and Brazil remains robust. Indeed, Jim McNerney, the company’s CEO, noted that Boeing’s defense, aerospace and security business continued to generate double-digit profit margins in spite of what he referred to as a “challenging environment.”
The Dreamliner nightmare doesn’t change all of those fundamentals, and Goldman Sachs (GS), for instance, has reiterated that it still views the company’s valuation as attractive, the fundamentals of its industry appealing and that it is maintaining a buy on the stock. (It just isn’t a ‘conviction’ buy any longer…) The Dreamliner news just makes “near-term outperformance of shares more difficult to see,” the analyst commented tactfully.
The biggest headwind facing Boeing bulls, however, is a longer-term reputational one. Even if the regulators sign off on the Dreamliner or the problems prove to be due to a tiny and easily-remedied fix – and even given that, thankfully, the problems have produced no accidents much less any fatalities – the Dreamliner’s name now is associated with problems, not with luxurious or comfortable long-range air travel. Given a choice between boarding a Dreamliner and any other kind of aircraft, which would you choose for a family vacation? It’s far too early to gauge whether airlines will actually take the drastic step of canceling orders or simply not place new orders, much less to try to understand what portion of 787 business will simply be directed to other Boeing planes. But it’s hard to imagine that there won’t be a long term question mark hovering over both the plane and the company’s ability to generate healthy earnings. And that means that unless Boeing is able to generate truly remarkable financial results, the stock could be stuck in a narrow-trading range at best, with the risk of more negative news on the Dreamliner outweighing much of its upside potential. This is not a stock for the faint of heart to view as a value today.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
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