Flying high with Boeing stock

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On January 10, 2013, Charlie Smith appeared on Bloomberg Radio “Taking Stock” to discuss Boeing stock and the latest news surrounding the company’s 787 Dreamliner aircraft. He chatted with hosts Pimm Fox and Courtney Donohoe, offering insight on the high-tech jet amid delivery delays and production complications. Below is an excerpt from the interview:

Q: Why is it that the Boeing stock seems to move based on news reports having to do with glitches in the introduction of the 787 Dreamliner?

A: Boeing has said that a key part of their earnings growth in 2013 will be built upon the ramping up of the 787 to 10 airplanes per month and many are betting that earnings are going to be built on that variable alone. As far as the stock goes, as soon as you get any news or a couple of bad events like we have seen in the last month, investors panic on the stock.

Q: What about competition from Airbus, specifically the A321, which has been introduced?

A: [The A321] has an engine variant that is very competitive with the engines on Boeing’s 737 aircraft. Those two have been running neck and neck in the narrow body space and the fact that Boeing was able to get an increase in the 737 book this year is what allowed the company to pull ahead.

Q: Which gets rewarded more… coming to the market first in delivering airplanes or delivering them soundly with absolutely no faults?

A: There are significant financial penalties when not getting an airplane into customers hands in a timely fashion. If your plane is going to be four to six years late, obviously your customers are going to go elsewhere. But, the fact that you have a duopoly here is the key point — customers really don’t have any choices other than Airbus or Boeing — so if you’re going to be a year late it’s not such a big deal, but if you stretch it past that, customers will have no choice other than to order from another company.

Additional insight from FPCG on Boeing…

In the weeks following the interview with Bloomberg Radio, Boeing has continued to make headlines as the 787 was grounded worldwide due to failure of two lithium-ion batteries and resulting safety incidents (a fire in a parked plane and an electrical fault which caused an evacuation). These incidents, both in airplanes in use by Japanese carriers, have caused investors to re-evaluate the airworthiness of the aircraft. We do not believe these incidents are due to a design flaw, but are instead due to either a manufacturing issue with the batteries themselves or an operational failure.

Both the U.S. FAA and Japanese aviation authorities are investigating the cause of the failures, and are expected to report within one month on their findings. In the meantime, the plane will remain grounded. Boeing continues to produce the 787 at a rate of five per month and this rate is expected to rise to 10 per month by year-end 2013.

Again, we regard these issues as normal “shakedown” problems that occur with an entirely new airplane. That said, if a design flaw is determined to be the cause, we estimate that redesign/rebuild could cause financial harm of as much as $3 billion to Boeing ($4.00 per share pre-tax), as a result of a need to switch to nickel cadmium (or some other) technology from lithium. The shares have already discounted this eventuality, in our opinion. Also, the entire airline industry and aviation suppliers worldwide are heavily invested in seeing this airplane fly as advertised. We do not think these incidents will be a long-term drag on the company or the stock.

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