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Monday, January 31, 2011

Boeing Holders Ride Out 787 Woes to Prepare for Payoff on Debut

Boeing Co. ended 2010 with delays for its two marquee jets, upheaval in its $35 billion tanker bid and a canceled defense contract. The same year, the shares almost doubled the gain in the Dow Jones Industrial Average.

Even with a likely drop in quarterly profit tomorrow, investors are looking past setbacks on the 787 Dreamliner and 747-8 and positioning themselves to benefit from the planes’ entry into service, said David Rowlett, an analyst at T. Rowe Price Group Inc., which owns 7.1 million Boeing shares.

Boeing’s outlook is “very positive” once deliveries begin for the 787, now more than three years behind schedule, he said. Demand for the 737 and 777, which produce most of the company’s commercial-jet revenue, has been so strong that Chicago-based Boeing plans to boost output through 2013 to record levels.

“People generally want to own the stock,” Rowlett said in an interview. “The 787 situation has been no doubt frustrating, but investors don’t want to hold grudges about past mistakes too long when a stock offers enough upside going forward.”

Adjusted fourth-quarter earnings may be $1.11 a share, down from $1.79 a year earlier, the average of 22 estimates compiled by Bloomberg. Full-year net income probably more than doubled to $2.99 billion, based on analysts’ projections, as improved production helped Boeing avoid financial charges for its delays.

Boeing fell 49 cents to $72.24 at 4:01 p.m. in New York Stock Exchange composite trading. The shares have jumped 25 percent in the past 12 months, and their 21 percent climb in 2010 beat the Dow’s 11 percent.

Dreamliner Focus

While the latest variant of Boeing’s 747 jumbo jet also is running a year and a half late, attention among analysts and within the industry has focused on the Dreamliner, the first jetliner built chiefly from plastic composites. It is Boeing’s best-selling new aircraft, with 847 advance orders.

“You’ve got a large, troubled development program that’s the primary concern, and it’s a big overhang on the stock,” Rowlett said. “At some point the 787 will get delivered and production will ramp up. Investors want to be there when that happens. That’s what keeps them interested.”

Boeing offers the industry’s best potential gains in 2011, provided the 787 arrives as promised, said Ken Herbert of Wedbush Securities in San Francisco, who is among 20 analysts who recommend buying the stock. Eight say hold and two say sell.

After the first delivery of each new model in the past two decades, Boeing outperformed the Standard & Poor’s 500 Index by an average of 8.1 percent three months later, Herbert said in an interview. Boeing’s advantage rose to 14 percent a year after each new jet’s debut.

Scarcity Value

“Scarcity value” also compels investors to stick with Boeing, Herbert and Rowlett said.

Only a handful of U.S. aerospace companies have a market value topping $10 billion, including Boeing, Precision Castparts Corp. and Goodrich Corp. That means options are limited for funds that invest only in large companies and want to buy aerospace shares, Rowlett said. The S&P 500 Aerospace & Defense Index has risen 20 percent in the past 12 months.

“We are approaching an up cycle, and if you want to get in the middle of that, now’s the right time to do it,” said Clay Jones, chief executive officer of cockpit-controls maker Rockwell Collins Inc., a Boeing supplier.

In October, Boeing said 2010 earnings would more than double to as much as $4 a share on sales that may reach $65.5 billion. Boeing’s orders more than tripled in 2010, swelling its backlog to 7 1/2 years, as demand recovered from the recession.

Aerospace Cycle

“If Boeing can, for once, avoid further problems on the 787 and enjoy the fruits of this aerospace cycle, that’s what investors are buying into,” Rob Stallard, an RBC Capital Markets analyst in New York who recommends buying the stock, said in an interview.

Challenges remain for Boeing, which faces a “difficult” time with its defense business as the U.S. government scales back spending, Douglas Harned, a Sanford C. Bernstein & Co. analyst in New York, wrote in a note yesterday. He rates the shares as “market perform.”

The Air Force still hasn’t decided between Boeing and European Aeronautic, Defence & Space Co. for its new aerial tanker, and the Senate Armed Services Committee plans a Jan. 27 hearing into the service’s inadvertent disclosure of each rival’s bid data late last year.

The Department of Homeland Security canceled Boeing’s SBInet “virtual fence” program for the U.S.-Mexico border, and lawmakers said in a Jan. 12 report that Boeing’s battlefield communications system for the Army is expensive and unreliable.

New Timetable

Shareholders got better news on Jan. 18, when Boeing unveiled the new timetable for the Dreamliner’s first delivery after a Nov. 9 fire grounded the six-plane test fleet and forced engineering changes.

The latest reverse shouldn’t hurt 2010 earnings, Boeing said. The stock rose 3.4 percent amid investors’ relief that the latest delay only amounted to a six-month postponement, to the third quarter. The original target was May 2008.

“The 787 has been a wild card for many of us for a long time,” said Jones, the Rockwell Collins CEO. “Ultimately the plane will be built, and when it does, it will be a positive to the company and will relieve the negative burden that has weighed on it. As you get toward the finish line, it boosts investor confidence.”

To contact the reporter on this story: Susanna Ray in Seattle at

To contact the editor responsible for this story: Ed Dufner at

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