Wow, Boeing’s huge delay of the Dreamliner 787 delivery date by six months really took a whacking to aerospace, industrials, and even the whole market yesterday. I don’t know how the delay of the Dreamliner has to do with the rest of the Dow, but I suppose it was a reason to take profits. Given how much I’ve touted the long-term secular growth story of commercial plane demand and how Boeing and its Dreamliner fits into that, I feel I should share my thoughts on yesterday's development.
To be clear, these are just my on-the-fly opinions, not facts or investment recommendations! Some readers have been getting on my case for saying this or that. Why don’t you do your own research and give me a solid rebuttal rather than just be emotional that I said something negative about your stock?
Anyway, this is definitely a disappointment for shareholders of Boeing and shareholders of the suppliers to Boeing for the 787. I would caution people to stay away from Boeing and a couple of its dedicated suppliers such as the smaller names I listed in the article Ten Plays on Boeing’s 787 Dreamliner - Part 2.
Yes, Boeing has been getting great defense and homeland security contracts lately. With its defense projects accounting for about half its total business, Boeing is able to maintain financial guidance for 2007-2008 and subsidize the 787 development costs. But guess what, people think Boeing’s just a commercial airplane maker, and just a 787 Dreamliner maker at that. Its like it’s other businesses doesn’t exist (I say this because it seems Boeing’s stock only reacts to Dreamliner headlines, both good and bad).
As an engineer and as someone with friends at Boeing, this narrowminded focus on the Dreamliner is really annoying. But the market is a mysterious beast. So, if this is how investors view Boeing, my game plan is to just swap out of Boeing into companies that are working on the Dreamliner but who are also diversified away from it.
I believe both United Technologies and Honyewell mentioned in Ten Plays on Boeing’s 787 Dreamliner - Part 1 are still great places to put your money. Both United Technologies and Honeywell should bounce back quickly and I would (and am) buying Honeywell on this weakness. As discussed in this previous post, these are diversified industrial conglomerates with minimal exposure to the 787 itself, although United Technologies’ Hamilton Sundstrand division has dedicated much of the past couple of years developing systems for the 787 and won’t see the return on that R&D until the 787 goes into full production.
I moved into Honeywell myself because it has great aerospace and defense businesses, and its position as a leader in electronic components for aerospace as well as autos and buildings gives it an advantage over the structural component makers. Also, auto component makers are seeing a turnaround lately, which should bode well for Honeywell. If not, the fact that Honeywell started a big buyback when the stock was around $57 should put a decent floor at that level.
The long term story for the demand of commercial airplanes has not changed. Growth nations are still in need of tons of new airplanes. And, even just for passengers’ safety’s sake, planes in developed nations need to be replaced. For the same reason that planes need to be safe, it is the right decision for Boeing to make sure everything on the 787 is perfect.
This is reminiscent of Microsoft’s delay of Windows Vista early in 2006 (except Boeing can’t release incomplete products and just release software patches later to fix things). MSFT got creamed when it delayed Vista, and I believe Boeing should trade down on this news. A six month delay is long, especially in the stock market.
More importantly, Boeing may have to take some charges for the late delivery to some of its customers. Just as the Vista delay was one of the greatest opportunities to buy MSFT, we might get another Dreamliner anticipation run for Boeing later next year. However, depending on the charges Boeing may have to take down and development costs spread over the longer time frame, I would be less enticed to jump on that move than I was to jump on the Microsoft dip on the Vista delay.
For now, better opportunities elsewhere. Aerospace and defense still works, just go with others who are telling you business is good. For instance, Lockheed Martin’s increased dividend, or Honeywell’s buyback. These two should work.
Disclosure: I own shares of HON as of this post.