Boeing Buyers Still Can't Sleep Easy

Updated January 10, 2013, 3:18 p.m. ET
 
By JUSTIN LAHART
The Wall Street Journal

The latest batch of Dreamliner troubles inflicted a rough two days on Boeing's stock this week. By Wednesday, though, at least some investors decided the panic was overdone: The shares were back into positive territory for the year so far.

But in their zeal to buy on the dip, are they ignoring other risks hanging over the company?

With a National Transportation Safety Board investigation under way, Boeing isn't commenting directly on the battery fire that occurred Monday on a Japan Airlines 787 parked at Boston's Logan Airport. But it defended its use of lithium-ion batteries on the jet, which it says are safe, and played down separate electrical problems that emerged in December. Notably, neither the NTSB nor the Japanese authorities have grounded the 787s, and the airlines that have them are keeping them in service.

Boeing can ill-afford any more trouble with the 787. After production and design woes that delayed its rollout by more than three years, costing Boeing billions, the day when the aircraft might finally start contributing to its bottom line has only just come into view.

The company delivered 46 Dreamliners in 2012—above forecasts made at the start of the year—and should deliver somewhere north of 80 in 2013. But if the NTSB determines there is a safety issue, production could be slowed.

More problematic, airlines might defer delivery, says aviation consultant Bob Mann of R.W. Mann & Co.

"Assuming the next couple of weeks don't bring us further headlines, this issue will probably go away," says Mr. Mann. "I think everybody is collectively crossing their fingers."

But the Dreamliner's problems aren't Boeing's only headwind.

Another is the as-yet unresolved issue of what manner of cuts might come out of Washington later this year. Investors tend to focus on Boeing's commercial-airplane operations, usually the main driver of growth at the company. But its defense business accounts for over 40% of sales and risks getting hurt.

The "fiscal cliff" deal put off mandatory government-spending cuts until March 1, but didn't banish them altogether. They would cut deeply into military spending. While it is extremely unlikely that Congress would let the entirety of the scheduled cuts go through, it is likely that any deal will include some defense cuts.

Commercial-airplane sales may also be due for a breather. Cheap financing and a desire for more fuel-efficient planes have boosted demand for aircraft beyond that required by air-traffic growth and normal scrappage rates, says UBS analyst David Strauss.

The implication is that demand has been pulled forward, suggesting orders may slow in the years ahead. At worst, it could mean the big backlog of orders Boeing and rival Airbus are sitting on is less solid than it seems—a risk that Dreamliner snafus hardly help with.

Investors taking Boeing's 787 problems as an opportunity to take a flier on the stock could face a long wait on the tarmac.

Source:   http://online.wsj.com