I believe Boeing (BA) is posed for good future growth but it is troubling the way the stock has moved as of late. With backlogs of more than 800 planes to build one would think the stock would be doing much better. With the delays and cost overruns for the Dreamliner, there are a couple factors that have come into play that may have led to the quick drop in price - and this includes economic conditions. But with the way things are playing out for the company, it may not make a significant move until later in the year.
Problems with India Air
India originally ordered 27 Dreamliners from Boeing. Well, the delays have been costly in fuel costs to the state-owned airline and it is demanding compensation for the extra costs it has incurred. They are demanding somewhere in the range of $500-$850 million. Now, there is no way Boeing will pay something like that but at the same time the two are negotiating some sort of compensation. Regular compensation for delays is between 5% and 10% so that outrageous amount will not get paid. In the meantime, Boeing has an airliner finished waiting for delivery but Air India will not take possession until the two sides reach an agreement.
Freight Sales Slow
Freight (and that includes air) have fallen along with the global economy. Not surprisingly, European air freight fell 4.6% but a little more surprisingly is Asia, which also fell 4.5%. Because of this freight orders are also down. No sales were recorded through May this year. A year ago 13 cargo planes were sold for a price of $3.75 billion. This hurts since Boeing has been on top of this for the past 5 years. Originally, delays and canceled orders marred production of Airbus' A380 freighter, which had been meant to assault Boeing's 90% control of the air freight market. 2011 was a banner year for Boeing with orders totaling 79 planes. The income this year is being missed.
One Analyst Says Hard Year for Boeing
UBS analyst David Strauss has focused upon the high cost of incorporating changes into the early production of the Dreamliners. While the company is focused upon building Dreamliners more efficiently and faster toward the end of this year and into 2013, the original costs of production are hurting Boeing. The first 1000 units were estimated to cost almost double the original price. (Almost $240 million compared with the $109 million original projections) Boeing delivered no Dreamliners during May and though it averages 3.5 a month currently and has a goal to reach 10 per month by the end of 2013, the costs overruns from the original productions are going to have a huge affect upon the company no matter when regular deliveries start.
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The Options Play
- Buy a November 2012 call with a strike of '70.00' (priced at $4.75)
- Sell a November 2012 call with a strike of '72.50' (priced at $3.40)
- Net Debit to Start: $1.35
- Maximum Profit: $1.15
- Maximum Risk: Net Debit
- Maximum Time of Trade: 5 months
Reasoning behind the Trade
- While we believe Boeing will become more profitable as it starts delivering more and more Dreamliners and gets paid upon delivery; it will not be quick.
- It has to deal with the cost overruns on its early deliveries.
- It has fallen so fast, it is bound to rebound here even for a small move up sometime before year's end.
Boeing is in good long position for growth, but do not count on it in the short term for anything significant.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
