Time's up for Boeing

The airplane maker has over-promised and under-delivered on the 787 Dreamliner for too long.

By Jim J. Jubak Jan 19, 2012 1:00PM
Image: Airline (© Christie & Cole/Corbis)Sometimes you just have to say that a trade hasn't worked out the way that you thought it would -- and that giving it more time just isn't going to help.

On Sept. 30, 2010, I added Boeing (BA) to my Jubak’s Picks portfolio with a target price of $84 a share by September 2011. The idea was that Boeing would solve its big problems with the 787 Dreamliner and the stock price would rise as planes started to roll off the assembly line.

It didn’t quite work out that way. Boeing’s shares were essentially flat with my $66.09 purchase price by the September 2011 deadline as delays exceeded even my earlier estimates and as late delivery penalties ate into the profit margins for future production. I gave the stock an extra year, extending my target price to November 2012 and cutting my target price to $82. My gains on this trade now come to about 13.5% since September 2010.

But now I think it’s time to cut the cord and sell Boeing. The company’s problems aren’t limited to over-promising and under-delivering on the 787. That style seems to go deep into management culture.

The following video discusses how Boeing's market share has dropped to a 40-year low.

Post continues below.
In 2011, Boeing delivered 477 planes, a few short of its guidance for 480. The company didn’t meet its target to deliver 15-20 787s and 747-8s (actual delivery 12).

At its December investors conference, the company said it would reach 787 production of 3.5 a month in late winter/early spring of 2012 and five per month by the end of 2012. That’s below the previous forecast of seven a month by the end of 2012.

The longer it takes to ramp production, the longer it will take for Boeing to actually make money on the 787.

I would be more inclined to give Boeing more time if other trends weren’t running against the company. In October, for example, Boeing said that investors should expect an increase in pension expense to $2.6 billion in 2012 from $1.7 billion in 2011. 

Proposed cuts in the U.S defense budget will hit Boeing, the third largest U.S. defense contractor, hard. Standard & Poor’s projects just a 1% increase in Boeing’s revenue from this unit (50% of total company revenue) in 2012. Operating margins for the company have climbed in recent quarters to 9.7% in the third quarter from 8.2% in the third quarter of 2011, but that’s not enough, in my opinion, to make up for the crunch in the defense business.

Boeing reports fourth quarter earnings on Jan. 25. I think earnings for that period are likely to meet Wall Street forecasts for $1.01. But I am worried about guidance for 2012.

I’d rather take the 13.5% gain I’ve got in this stock as of Jan. 18, avoid that risk, and look for a company with a better record on meeting its promises.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Boeing as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Tags: BA
8Comments
Jan 19, 2012 5:26PM
avatar

Shawn3179- If you looked into what went wrong with boeing it is actually the opposite. Boeing thought they could move jobs overseas and saved a buck or 2. They cut engineers and manufacturing here and then sent to jobs overseas. Turns out making a state of the art aircraft is a bit tricky and the overseas manufactures couldn't make high quality parts and as more and more the part came in and failed, the plane got delayed. The plane got further and further delayed waiting on key components that were contracted out and never returned and in the end man component ended up being constructed here in the "terrible union" factories because no one else had the technical ability to do this. Unfortunately Boeing has limited capacity at these factories because of earlier cuts and shuttering of factories, so the 787 is further delayed. The 787 is pretty much a case study of how not to do outsourcing.

Jan 19, 2012 3:34PM
avatar

Another company forced into being "uncompetitive" by the unions and the democratic party. Boeing tried to keep its manufacturing in the US by opening another operation in NC. The Obama machine got it marching orders from the union bosses and used or are using the entire force of the US  legal system to keep Boeing from opening up in a right to work state! Meaning that Obama , the Democratic party and most especially  the Union Millionairs would rather see Boeing in China than a right to work state in the US!!!

    This is what happens to EVERY industry that the unions  and the democratic party take over (one in the same) . The Steel industry, The Textile industry and the Automotive Industry (GM , ford just assemble here everything is made out of the country) In the case of the Automakers the unions know that if they made everything here then the starting price for a stripped down version would start at $22,000!  

    Honda makes there parts and assembles in Ohio with no UNION!! although alittle more expensive the hold there resale value far better that a UNION built auto, plus even a little civic will last 300,000 miles! A good american car 100,000 and it is constant repaires by 150,000 to 175,000 it is dead!!

UNIONS destroy jobs and cause the price of everything to go up and be made cheaper!! There time has gone unless we want to end up like the EU or Greece!

Jan 19, 2012 2:15PM
avatar
hang  in there, you have ridden it  this far and the big payoff is coming soon...
Jan 19, 2012 5:20PM
avatar
This the same guy who sold intel at about 19 now over 25
Jan 22, 2012 8:31PM
avatar

e: MT31

"Turns out making a state of the art aircraft is a bit tricky and the overseas manufactures couldn't make high quality parts and as more and more the part came in and failed, the plane got delayed. The plane got further and further delayed waiting on key components that were contracted out and never returned and in the end man component ended up being constructed here in the "terrible union" factories because no one else had the technical ability to do this."

 

Blaming everybody else for Boeing's self inflicted problems is of course the easiest and least productive way to change what needs to be changed to survive. What drivel to state that only Americans can produce "state of the art aircraft" with Airbus beating Boeing consistently since 2003. They must do something right to keep the number one position? An even greater problem America and Boeing have is the medieval measurement mode they still use. To expect metric engineers and workers, who have neither the feel nor inclination to work with that cumbersome anachronism and get it right, borders on hubris. To insist on that anomaly in metric countries costs Boeing and America billions of dollars annually (see your never ending astronomical trade deficits). They only way out of this predicament is to join the metric world. Failing that and with metric China producing its first civilian airliner, I would know what to do with my Boeing shares.

Jan 20, 2012 10:16AM
avatar
Bigger for Boeing right now is the tanker. If it stays on track, Boeing will be just fine. The 787 and 747-8 will get it together. The 737 MAX isn't overly complicated and after the 787 you should expect them to find a way to deliver on time. The biggest issue for Boeing is the fixed price tanker contract. Will they deliver on time and anywhere near on budget? So far everything out of Boeing and the USAF is good news. But then again they are shutting down Wichita, home of the Boeing tanker experts. Are they getting rid of the experts? Are the experts willing to relocate to Seattle? Most Midwestern people with families have no desire to move to a city on the coast with a 30% higher cost of living. Time will tell.

x-country, they might have a huge cash flow but they are going to start spending that on the tanker, 737 MAX, 777 re-wing, and soon enough a 737 replacement. I wouldn't expect any sort of "off the charts" dividend any time soon.

Jan 19, 2012 9:13PM
avatar

Jim. 

Your analysis is shallow.  Provide detail on the following points in Boeing history.

 

1. increase in price of boeing stock over next 3 years starting with day 1 of 1st 737 delivered

2. increase in price of boeing stock over next 3 years starting with day 1 of 1st 777 delivered

 

The 787 is larger than both programs.  Forget everything leading up to now.  Boeing has delivered #1.  Boeing will figure out the production ramp.  But, #1 is out the door and we are flying.  Hold on for the next few years.  The stock simply can't remain where it is.  Otherwise, the dividend yield will go off the charts because they will be raising the dividend with the cash flow generation that is coming with this program. 

Jan 19, 2012 2:57PM
avatar

Boeing sure has an astounding history, including a funny early 60s movie, "Boeing, Boeing" with Tony Curtis as a playboy juggling three flight attendants ("stews" in those days) at the same time.  In 1970 Boeing in the Seattle area laid off a huge number of workers.  A billboard said, "Will the last person out of Seattle please turn off the lights"....

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
266
266 rated 2
485
485 rated 3
660
660 rated 4
586
586 rated 5
652
652 rated 6
640
640 rated 7
504
504 rated 8
289
289 rated 9
159
159 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.