On December 14 Boeing (BA) shares showed up in an unusual category: For the first time in five days the stock wasn’t listed among the worst performing stocks among the Dow Jones Industrials. Instead it showed up on the other side of the ledger among the best performers.
All it took was an announcement from Boeing that it was raising prices for its planes for the first time in two years.
The size of the increase—5.2%–isn’t especially important. Any price increase at all is confirmation that demand for aircraft is running so hot and supply is so limited that aircraft makers can charge more for their product. Airlines are so serious about refreshing their fleets after postponing buying during the industry bust that they’re willing to pay more for new planes. (Or at least that they’re willing to start their negotiations on price at a higher level. All planes sell at a discount.) Boeing’s previous price increase—2.6%–came in 2008.
Boeing and its rival Airbus have pushed production lines to record rates in order to work down a seven-year backlog of orders.
None of this, of course, means that Boeing’s very public problems with its 787 Dreamliner are over. The plane has suffered delay piled on delay piled on delay—the most recent caused by onboard fires during test flights (November) and the breakup of a Rolls-Royce engine during ground testing (August.) Delivery of the plane is about three years behind schedule.
If you think that the company will work through the problems of the 787 and begin delivery of the plane in the third quarter of 2011, as analysts now estimate, this is the time to accumulate shares. The plane’s original delivery target was May 2008 and before the fires and engine failure the target was the first quarter of 2011. Fortunately, Airbus has had its own problems and its competitor plane isn’t like to be ready for delivery until 2013.
I think with all the troubles at Boeing the current price of shares near $65 is a good entry point. Until the turn around today, the shares were down 5.5% in the last five sessions. I added the stock to my Jubak’s Picks portfolio https://jubakpicks.com/the-jubak-picks/ on September 30, 2010 at $66.15.
As of December 5, I’m keeping my target price on these shares at $8l3 by September 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Boeing as of the end of November. For a full list of the stocks in the fund as of the end of the November see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
I am holding BA, I keep up to speed on developments there, and I think Jim’s basic analysis is OK. Let me add three points. 1. The larger problem with the electronics bay fire was not so much that blasting the air conditioning apparently over-stressed the circuits, it was that it revealed unimagined flaws in the software of the power management systems. Those unsuspected flaws now need to be better understood and addressed to the FAA’s satisfaction. But this is certainly within BA’s reach. 2. A few months ago the KC-X tanker competition seemed like a lock for BA when Northrop-Grumman pulled out. The late entry of a bid by EADS, followed by a serious leak of information by the Pentagon, now raises uncertainty about that process. Meanwhile, insiders are reporting that BA executives are feeling much less confident about their 767-based solution now that they know more about the A330-based package EADS put together. My conclusion is that maybe a split contract (half from each source) is the most one could price into BA’s stock. 3. Meanwhile, don’t neglect the upcoming battle-royale in the arena of single-aisle airframes, including the 737 and the A320. Both need to be upgraded to remain competitive and the question is how to optimize the significant costs of development.
I could imagine BA at $83 by Sept. ’11 but I think the best window for appreciation may be farther into the future. …like, when a) the 787 assembly lines are truly running at maximum capacity, b) the A350 starts to run seriously behind schedule (not such a bold prediction), and c) when the technological advances behind the 787 begin working their way into other aircraft.
Off Topic: China’s Ghost Cities (or You Really Think There is no RE Bubble in China?): http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12?slop=1#slideshow-start
Jim – looks like a glitch in the Boeing target – my screen is showing $813 but the 1 looks like a special character or something – assume really is $83 as earlier. thanx
Off Topic: Bank of America in settlement talks over mortgages: http://online.wsj.com/article/SB10001424052748704828104576021931692718582.html