Boeing: Dreamliner Delays Are a Gift

Mad Money’s Jim Cramer spent a large portion of his Monday show discussing his biggest gaffes of the year. Cramer draws a lot of criticism for his stock recommendations, but at least he is willing to point out his faults, and he tries to use them as an opportunity to learn. In this case, he singled out his recommendation to make a quick buck off of Boeing (BA) as there were rumors that the company would fly their revolutionary Dreamliner jet for its first public appearance in June. The trade did not materialize the way he had hoped as the Dreamliner was delayed again, and Boeing stock fell from the low $50’s to below $40 in about two weeks' time. Here is Cramer’s mea culpa:

“Let’s talk about one of my biggest screw-ups, recommending Boeing as a trade ahead of the Paris air show. Because I believed they would be able to fly the new powerful and fuel efficient Dreamliner into France for the occasion. I thought it would be..as it turned out, Boeing used the air show to reveal exactly the opposite of what I predicted. It admitted that it still couldn’t build the darn thing the trade was a total and unmitigated disaster. A virtual Hindenberg.

What should I have done instead? Boeing was an investment, not a trade. There was simply no reason to brand it as a trade. Sometimes the sin is coming out here on “Mad Money” and playing the hedge fund game like I used to, trying to come up with a quick winner, which is what I tried to do here. When instead, I should have been making for the home game, the long-term case for Boeing. This was my bad.

The story behind this stock wasn’t about how quickly they could get the Dreamliner and it wasn’t about the analysts taking up numbers after an amazing Paris air show. It was about the beginning of a brand-new multiyear air show. One that would have been irrespective of when the airliner flew. Not some stupid trade. I did get the idea from Wall Street and a lot of the smart guy analysts were suggesting it would launch in time for the show. They got it wrong.

This is my show. I can’t just say, hey, they got it wrong, sorry. I should have pointed out that many were speculating they were about to fly but short-term its no big deal if you miss it for a month or two. If I made the case for Boeing, that you could have made a lot of you could have bought the stock on the way down, when they told us they couldn’t even build the Dreamliner yet. Knowing they were in for a multiyear run when they did manage to build it. I broke one of my cardinal rules, which is never turn an investment into trade.

…This would have been a terrific investment opportunity to buy Boeing down in stages, as I always teach you. As the hot money crowd punted the stock. I kept can you out of buying the stock at a 4% yield instead of selling it into the vortex, which is a strategy led you to do. The only way I can atone for this mistake is by making the long-term case for Boeing…”– CNBC’s Mad Money 9/28/2009

Cramer took a speculative slant on this stock when he should have been looking at it from a long term perspective. At Ockham, we always view stocks in terms of their long term value, and we continue to be a believer in Boeing. As Cramer has come to realize, the Dreamliner is a multiyear opportunity as it will allow airlines to save on fuel costs. They have a massive backlog of orders that will keep them busy for years, once they are ready to start production. This project has been years in the making, and the hiccups have been well documented. However, the reality is that when it eventually is available it will provide steady revenue and earnings for Boeing for many years.

Boeing is priced attractively at these levels even with the Dreamliner not yet in production. Over the past ten years, Boeing has traded in a price-to-cash earnings range of 11.5x to 18.5x, and the current metric falls below 10x. For further evidence of this stock being undervalued based on strong fundamentals let's look at price-to-sales, which has normally ranged between .8x and 1.3x and is currently only .55x.

We are in agreement with Cramer that this stock is Undervalued for the long term, and should be viewed as an opportunity. At this point, the Dreamliner is more of a psychological barrier to the stock reaching its historically normal valuation ranges. Cramer even said that the Dreamliner delays are a gift, as it allows investors to buy-in cheaply on this unloved company. The stock is out of favor with the market and still strong fundamentally, and it offers a decent yield for shareholders. We would expect this stock to trade between $64 and $85 per share, given the company’s performance.

Original post

Comments

[oldman:]

it sure takes investors a long time to recognize an investment, doesn't it?

Sep 29 01:15 PM

[occupant:]

Boeing decided to out source a lot of the B787. Yet another corporation involved in union busting and moving jobs over seas.. They forgot where they came from and moved their headquarters from Seattle to Chicago probably to get away from the scene of the crime. The components they are getting back are garbage and need to be fixed. This aircraft would be flying right now if it had been made in America. Too bad we aren't in Japan where company leadership still has the honor to resign.

Sep 30 09:52 AM

[Swanson:]

It is a good thing that they outsourced a lot of the work on this aircraft. Yeah, most of the parts aren't up to exact Boeing standards, but they also didn't pay the $75.00 per hour to the union to build them. Everyone says they want to break the union, that may be true. People forget that Boeing is a business and businesses need to make money. Paying outrageous salaries is not a way to make money. The greedy unions in Washington state and anyone that has been following this story know this is why Boeing is looking to other states to build a second assembly line. Good for them. The union is going to whine about it, just like they always do, but the first chance those people get, they will be in South Carolina working for less wages doing the same job. Way to price yourself out of the aircraft building business union! Smart move on your part.


On Sep 30 09:52 AM occupant wrote:

> Boeing decided to out source a lot of the B787. Yet another corporation
> involved in union busting and moving jobs over seas.. They forgot
> where they came from and moved their headquarters from Seattle to
> Chicago probably to get away from the scene of the crime. The components
> they are getting back are garbage and need to be fixed. This aircraft
> would be flying right now if it had been made in America. Too bad
> we aren't in Japan where company leadership still has the honor to
> resign.

Sep 30 10:27 AM

[bobbobwhite:]

Boeing is going the way of GE, and if something doesn't turn around in creating more manufacturing jobs in America, Boeing's planes will be a conglomeration of outsourced parts, mostly from other countries and of possibly questionable quality. Where that may potentially lead is a scary thing. Lost jobs is the case with all manufacturing in America not just with Boeing, but because it is a national icon company it stands out, along with GE.

Something has to change if America is to improve.

Sep 30 11:06 AM

[Dorlan H. F...:]

This is poetic justic. I hope they lose thir shirts. This outsourcing nonse is gone too far. If Americans cant mak aeroplanes, what can they make?

Sep 30 11:52 AM

[DUP:]

Cramer is a retard. Un watachable, unlistenable, what he says or thinks is meaningless. Why does CNBC have that clown on teh air. And Boeing has done themselves in, like GM, and so many otehrs. Whirlpool over expanded and buying every competior, now they cloe down factories, f em all, Wall Street has ruined everything that the unions had not. Then there are teh blowhard politicians telling us how to live, when they are all more fools than anything else.. Every empire falls, we fell faster than most. China made airplanes don't sound like a future that is any good. They can't even make dog food safe. Greedy companies with managment that is short sighted, ruins all the industrys. .

Sep 30 12:03 PM

[mikel:]

Cramer is a retard and Boeing is a giant retard. Boeing has been an empty shell of its former engineering self for years. The 787 just brought it to light. I look forward to the collapse. Anyone who thinks it'll all come together suddenly is delusional.

Sep 30 01:27 PM

[Alan von Al...:]

Disclosure: short BA, price target $35

Sep 30 01:37 PM

[jackooo:]

Union wages cost the rest of us money. The most short sighted people I know.
IAM member for 34 yrs.

Sep 30 01:48 PM

[Truth-hurts:]

6% of the cost of a commercial jet is labor. Whether you pay the workers $75 an hour, $100, or $0.10 is largely in the noise. The real question is whether you want brand loyalty from your Customers because you build a quality product, or whether you want to maximize management bonuses from trying to squeeze every cost.

Oct 02 11:47 AM