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Boeing Co. workers finish the side-body of the 787 Dreamliner, a new aircraft made of mostly composite materials.


Analysts like Boeing if 787 delivered on time

by Tara Lachapelle
Jan 28, 2010


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Tara Lachapelle/MEDILL

Boeing Co. reported $1.3 billion in earnings for 2009. Analysts say the much-anticipated 787 Dreamliner, which already has 851 orders, should positively affect the company long term. Earnings dipped in 2008 due to a mechanics' strike that slowed production.

As Chicago-based Boeing Co. enters the final stages of flight testing for the long-awaited 787 Dreamliner, an aircraft made half of composite materials, aerospace industry analysts say much of the company’s financial future depends on timely deliveries of these new planes. They like the outlook, but don't expect it to lift the stock.

Boeing recently released better-than-expected earnings, easily beating Wall Street’s predictions and showing signs of recovery from its previous sales slump, having sold 480 commercial aircraft in 2009 and won contracts with the U.S. Army.

The company earned $1.3 billion, or $1.84 per diluted share, in fiscal 2009, a 51 percent decline from $2.7 billion, or $3.67 per diluted share, in 2008. But sales jumped 12 percent to a record $68.3 billion from $61 billion. Boeing also has an order backlog equal to four and a half times its 2009 sales.

According to Morningstar Inc. analyst Brian Nelson, various events could hurt the company down the road, such as prolonged economic softness, further delays in delivering the 787, ascendency of foreign aircraft manufacturers and budget wrangling in Congress.

“Nonetheless, we still like this aerospace giant over the long haul,” Nelson wrote in a report.

Boeing forecasts 2010 sales to be between $64 billion and $66 billion, and earnings to rise to between $3.70 per diluted share and $4 per diluted share. Analysts estimate even higher earnings of $4.26 per diluted share for 2010.

“Boeing, itself, is a great company,” said Nathan Smith, an industry analyst from Frost & Sullivan Inc. “It has had a big setback due to its 787 program, but once this aircraft starts flying and getting delivered, there is a very good chance Boeing will do very well.”

However, with the stock currently selling just under $60, the analysts' mean target price for it is only $59.56. Morningstar’s fair value estimate is even lower, at $53. The 52-week high and low were $63.40 and $29.05 with the stock closer to the high end for several weeks now. But the analysts give the stock mostly buy ratings. Despite having returned to 2008 third-quarter levels, it hasn’t reached the high of $82.68 it saw in May 2008.

“We put a strong finish on 2009 by getting the 787 in the air and generating solid core operating performance across the company,” said Boeing CEO Jim McNerney.

“Boeing has two good aircrafts now,” Smith said, referring to the wide-body 777 and the narrow-body 737 jet. “And when the 787 comes out, it will definitely be a money-maker for Boeing.”

The new model boasts a material breakout of 50 percent composite materials, a lighter and narrower body, 20 percent more fuel-efficient and 20 percent fewer emissions. But production holdups have pushed back the release schedule causing some to question whether the already delayed production will meet the new delivery date set for the fourth quarter of this year.

“The key here is certification, delivery and production of the 787,” Nelson said, noting the popularity of the new plane across foreign markets.

The Dreamliner series originally comprised three different aircrafts: the 787-3, 787-8 and 787-9. The 787-3, made for shorter-range flights, was specifically designed for Japanese carriers. But when Japan Airlines and All Nippon Airways switched to orders for the other 787 models, Boeing decided to scrap the 787-3.

Boeing said it has 851 orders so far for the 787-8 and 787-9 with the most orders coming from All Nippon Airways, Qantas Airways of Australia, Continental Airlines, Air Canada and Etihad Airways of the United Arab Emirates. According to Boeing spokesman Bernard Choi, the orders have a backlog value of $144 billion.

“It is imperative that Boeing delivers this aircraft by the end of the year,” Smith said. “If we go into 2011 and they haven’t started delivering them, that will hurt the company significantly.”

But that isn’t something analysts foresee happening. “For the 787, [Boeing] looks really good because, for the moment, the Airbus A350 is still a paper airplane,” said Aaron Altman, an associate professor at the University of Dayton, who specializes in aviation design and technologies.

Airbus SAS, a European aircraft manufacturer and Boeing’s largest competitor on the commercial side, has been working on a similar composite aircraft for some time but, echoing Boeing’s recent production delays, the A350 is behind schedule with an expected delivery date set for sometime in 2015.

“They have some catching up to do in that regard,” Altman said.

“I believe Airbus’ new aircraft is a direct competitor to the 777 and 787,” said Lord Cole, a Ph.D. candidate in aerospace engineering at UCLA. “But a lot of it is going to come down to how well Airbus will deliver.”

Morningstar also noted the possibility of China's becoming a serious competitor by 2020, possibly afflicting Boeing’s profitability in the commercial segment further down the road. But Scott Testa, a business professor at Cabrini College in Philadelphia, said he sees that as a very aggressive timeline.

“Building an airliner is not like building a car,” Testa said, referring to the required Federal Aviation Administration and European Aviation Safety Agency approvals. “Does that mean it’s not going to happen? No, but I will say that it just seems very ambitious.”

Nelson highlighted Canada’s Bombardier Inc. as another competitor against Boeing’s 737, which Boeing is looking to re-engine. “Right now, the regional jet guys are hovering in slightly above the 100-seat market, but the CSeries from Bombardier is going to be a threat in some respects,” Nelson said, citing more efficient technology and higher seating capacity than Boeing’s 737-600 and 737-700.

Boeing aims to begin delivery in 2011 of its 747-8 Freighter, an update of an older freighter model with an added 18 feet and 16 percent more cargo volume. Analysts are not concerned with the 747-8’s flight tests because it is not a new plane, but an enhancement of an existing one.

However, analysts don't give much weight to the 747-8's sales outlook. “I don’t think it’s as bright as Boeing thinks it to be,” Nelson said. “But I do think there is a market for it. It’s just going to take a long time to justify and actually arrive at profitability for this aircraft.”

On the defense side, Boeing has acquired more international defense contracts, but is also looking to expand into other markets such as cyber security in case the government trims aspects of the U.S. military budget. Boeing’s transformational satellite program, which provides orbit-to-ground laser communications, was recently removed from the defense budget proposals.

“We have long anticipated that the U.S. defense budget, which is the world’s largest by far, would flatten in terms of the rate of growth,” Blecher, the spokesman, said.

Boeing defense segment’s 2009 revenue rose to $33.7 billion, up 5 percent from $32 billion in 2008, and operating earnings grew 2 percent to $3.3 billion from $3.2 billion.

“They do have a large opportunity on the defense side with respect to the aerial refueling plane,” Nelson said. “As of right now, their only competitor is Northrop, which appears to be playing hardball with not wanting to participate in the next re-bid, so Boeing appears to have the upper hand.”

Despite some growth potential in the defense segment, analysts continue to emphasize the importance of commercial aircraft sales and deliveries for the company’s health over the long haul.