Boeing: Dreamliner Delays Are a Gift

| About: The Boeing (BA)

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 (NYSE: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 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.BA

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.

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