Boeing at all-time high as new Dreamliner flies
Investors believe the worst is over for the long-delayed 787 and have pushed shares to record levels.
For investors, the payoff on the Boeing (BA) 787 Dreamliner came late, but it is here now with airlines finding new uses for the plane, a new costlier model flying for the first time on Tuesday and Boeing shares flirting with their all-time high.
Still, the teething pains for the aircraft continue. On Sunday, Norwegian Air Shuttle had to leave 70 passengers in New York because of a hydraulic pump problem. Earlier this month, Boeing briefly grounded its two 787s due to brake problems and other issues. The planes were grounded even as the airline was touting its 787 purchases and route expansion that will have its Dreamliners in four U.S. cities by this summer.
John Goglia, a former member of the National Transportation Safety Board who blogs on airline safety for Forbes, said the 787 is now safe even if no one knows the cause of the battery fires that caused the FAA to ground the aircraft for three months early this year.
"We don't know enough to blame the battery," Goglia said. "Boeing put in a containment vessel for the battery and they added additional sensors so they can tell sooner what is going on with the battery and the electrical system. There's not much else they can do," Goglia noted. "I believe they have done enough that we won't see the problem again."
Investors are equally confident. Boeing shares closed Tuesday at $117.11, up 55% this year. Shares reached an all-time high of $117.48 in intraday trading Tuesday.
On Tuesday, the Boeing 787-9 took its first test flight. The current model 787-8 can carry 210 to 250 passengers and has a range of 7,650 to 8,200 miles. The 787-9 can carry 250 to 290 passengers and has a range of 8,000 to 8,500 miles. The planned 787-10 will be able to carry 300 to 330 passengers and has a projected range of about 7,000 miles.
The 787-9 has a list price of $244 million, compared with a list price of $207 million for the 787-8. No one pays list price and many customers pay about 50% of list, analysts said.
The airplane flew for five hours and 16 minutes, taking off from Paine Field in Everett, Wash., and landing at Seattle's Boeing Field. "We've got five more hours of gas left in there," Bryan said after the plane landed, according to The Associated Press. "We'd still be flying if they hadn't told us to bring it back."
Two additional airplanes are in the final stages of assembly in Boeing's Everett factory and will soon take to the skies for testing, the company said.
Air New Zealand will take the first 787-9, with delivery scheduled for mid-2014. Twenty-five customers from around the world have ordered 388 787-9s, accounting for 40% of all 787 orders. First delivery of the 787-10 is tentatively scheduled for 2018.
First delivery of the 787-8 took place on Sept. 26, 2011, to Japanese carrier All Nippon Airways. It was three years late.
On Monday, Sterne Agee analyst Peter Arment raised his target price to $164 from $120, triggering a share price increase on Monday of $1.94 to $115.67. "Our model now reflects higher 787 deliveries as production ramps further in mid-decade along with out-year increases as the 737-MAX enters production," Arment wrote.
"With 5,000 aircraft in backlog, BA's unmatched visibility makes it a must-own stock within mega-cap industrials," he said. "We see over 50% upside in BA over the next 12-18 months." He said 787 production should hit 14 per month in 2016.
"There are several catalysts still in front of Boeing, such as the 777X launch, the 787-10 orders coupled with extension of the 787 accounting block, and a new buyback authorization," Arment added. His $164 valuation reflects a multiple of 10x to 12x on 2015 estimates.
Speaking to an investor conference on Monday, Boeing CEO Jim McNerney talked about production rate increases. He said Boeing is focused on reaching its target of 10 787s a month by the end of the year. That would be "the largest production rate for any widebody airplane ever," he said. Before increasing that, he said, "We want to be stable at 10 for a period of time to reduce risk.
"The two words '787' and 'stable' have not always been used in the same sentence before," McNerney said. He added that the market wants more increases, but "the bigger question is on the readiness of the supply chain to do it."
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