Boeing's Dreamliner Nightmare May Present Investor Opportunity

The Boeing (BA) Dreamliner continues to have its recurring nightmares. Tuesday’s announcement marked the fifth postponement in its two year delay. Below is an excerpt from the New York Times:

The Boeing Company said on Tuesday that it would again delay the first flight of its new jet, the 787, the latest setback in a program that is considered crucial to the plane maker’s future.

Boeing executives said that they had found additional stress where the wings attach to the sides of the plane. Minor modifications should fix the problem, they said.

But they also said it could be weeks before the flight testing could resume. And stock analysts said that it would mean a delay in the delivery schedule, a concern that caused the company’s stock to drop as much as 9 percent Tuesday morning..

See the entire story @ the New York Times

Technical analysis of Boeing’s daily chart over a seven month period shows the stock had already been showing plenty of signs of cracking. However, Monday’s new low broke temporary support levels and violated its uptrend. After having rallied to +83% return from its March 2009 lows, BA has retraced 38% of its upside move and trying to find support. The next key areas of support are at its 50% and 62% retracement levels, i.e. respectively @ $41.18 and @ $38.23.

Fundamentally, the problems it has encountered bringing this plane to market are of its own doing and, while not good, are still more desirable than facing customer cancellations. Besides, is it humanly possible to screw up this roll-out many more times? Boeing and Europe’s Airbus represent a duopoly in the commercial air transportation industry which is long overdue for an upgrade cycle. Valuation-wise, the stock trades at a P/E @ 15 and sports a dividend yield @ 3.6% and PEG ratio @ 1.25.

Whether there is more potential downside from its current price ($43.48 while writing this report) could depend a great deal on investor sentiment towards the broad markets. Ideally, it would be nice to see BA retrace to @ $38.00 per share range which would produce an attractive dividend yield @ 4.4%. For an acquisition strategy, I might be inclined to write naked out-of-the-money puts if the price continues to fall and for risk management upon acquisition, probably collar the stock with a long put and short call. Nothing is ever certain in the stock market, but I would take bets that when the Dreamliner can fly, it will be too late to buy.

(P.S. To anyone with reading comprehension problems, I am not advocating the outright purchase of BA shares at this price. Instead, I am calling attention to it as an acquisiton candidate in the event of further broad market volatilty and a lower share price. For those skilled enough in options trading, the writing of covered puts or spreads may also present some profitable opportunities.)

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[User 283977:]

I don't know J -

Not meeting their delivery date on the 787 is going to really hurt them as it raises all production costs, and looses booked sales. What's next, dropping or reducing the dividend?

Will they get the tanker business? Don't know, but I do know their Raptor business is in trouble. I don't know any reason to own this stock at this time. I see investment opportunities, just not at this time.

Jun 25 01:02 PM

[spald_fr:]

The parts of this aircraft originate from all over the world and are assembled in Everett, Washington. I believe Boeing has close to 900 orders from about 60 customers.

Structural problems with the wing are relatively easy to fix. Safety prevails, so flight testing is delayed (as it should). This craft is the future of commercial aviation, imo.

The F-22 Raptor is jointly developed by Lockheed Martin and Boeing.

I agree with User 283977 regarding investment opportunity, "just not at this moment."

Jun 25 01:19 PM

[frosty:]

Three times in the last 10 or so years, when it appeared that Boeing was on the verge of becoming the most successful company on the planet, they made me cry. The last time was roughly a year ago when Airbus could do no right and Boeing was landing so many 787 orders they needed faster computers to count them all. Crash - a strike knocked the bottom out of the stock and I lost again. This may be the best time of all to buy Boeing, but over my 10 year history with the company I've seen payola fines, criminal investigations, strikes, overly rosey forecasts, etc., etc., indicative of a management culture that I will never trust again. There are thousands of other companies to invest in.

Jun 25 01:37 PM

[Mr. Ed, Jr.:]

The Dreamliner is maybe one more delay away from damaging BA for years to come. Sure, it may turn out to be a wonderful plane, but given its history, I am wondering if perhaps Boeing just got way ahead of the technology on this one.
I see no reason to get involved, especially in this economic environment.

Jun 26 02:46 AM

[manya05:]

You can play all the games you want with the stock short-term, but long-term Boeing is a short. It will be the second shoe to drop and the final chapter in the complete collapse of the manufacturing/heavy industry sector in the US. What happened to GM will happen to Boeing, it will be long and protracted because Boeing receives substantial subsidy through its defense side, but it is inevitable that Boeing will disappear as a concern in the commercial aircraft arena. The key new technology for the 787 is Japanese. It is the classical approach, they are trying to spread and reduce risk, OK, but that who owns the risk, reaps the profit. How long before the Japanese make their own aircraft based on the technology they developed? You need to manufacture (make it) to really know what you are doing and be successful in the hardware sector, but MBAs do not understand this and keep going the route of subcontracting, partnering, etc. etc., all of which ends up diluting your knowledge base and in the end kills you. I think long-term Boeing is toast.

Jun 26 05:37 AM

[KIT:]

Watch for contracted suppliers to fail as orders they expected do not show up in time. Look for more delays as suppliers struggle.

Jun 26 08:11 AM