Congrats, Boeing, but Now Your Run Is Done

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Tuesday was a great day to be a Boeing (NYSE: BA  ) investor. After years of delays, the company launched its first 787 Dreamliner into the skies, en route to delivery to Japan's All-Nippon Airways in Tokyo. Ferried aloft with the plane is a soaring stock price for Boeing, which after rising 4.2% in anticipation of the launch yesterday, tacked on an additional 2.5% gain this morning.

It's "official"
The plane's first "official" delivery sets up Boeing for a marathon run from today's production rate. Over the coming months, 787-building will accelerate from two planes per month, to 2.5 planes by November, then 3.5 planes early next year -- eventually topping out at a frenetic 10-planes-per-month pace.

With 800-odd planes on order backlog, and more on the way, accelerating production is Boeing's best chance to smooth things over with disgruntled customers like ANA, United Continental (NYSE: UAL  ) , AMR (NYSE: AMR  ) , and Delta (NYSE: DAL  ) -- all of which have been kept waiting for years as Boeing got its supply chain unkinked. It's the best way, too, to assuage the anger at suppliers such as Spirit AeroSystems (NYSE: SPR  ) , General Electric (NYSE: GE  ) , and Honeywell (NYSE: HON  ) , which have been ready for years to help Boeing build the 787 -- but been kept waiting by their customer's faulty production planning. Faster production also brings Boeing closer to CEO Jim McNerney's goal of earning "huge sums" on initial plane sales, followed by "an annuity for the next 25 to 35 years" as Boeing sells customers spare parts and collects fees to service the planes.

Now here's the bad news: The first nine years of this multi-decade revenue stream are going to look simply awful. As far back as June, Boeing had been warning investors that despite enjoying incredible sales success, the 787 would not actually become profitable "for some time." Yesterday, management put a number on that caveat: New Dreamliners will begin grossing profits by 2020.

Foolish takeaway
If all Boeing was telling us were that the 787 might not earn a profit for nine years, that would be bad enough. But it gets worse. Selling each incremental 787 at a loss means that by building planes faster, Boeing may actually increase the size of its losses over the next few years. As an investor, I wonder what effect this will have on the stock price once Mr. Market begins to notice the earnings impact.

My advice: Enjoy this week's gains while you can. They won't last long.

Or could I be wrong? Add Boeing to your Fool Watchlist and see if the stock can hold onto its gains.

Fool contributor Rich Smith does not own shares of, or short, any company named above. Motley Fool newsletter services have recommended buying shares of Spirit AeroSystems Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2011, at 4:52 PM, jrusso9722 wrote:

    I think a run has just begun. 787 will get mega attention at terminal gates.Boeing Ad campaign will begin. Airline BO Directors will convene meetings on replacing current a/c. Airline ad campaign will begin. Media will do news clips. A350XWB may suffer delays, as 787 did. Airlines will want to place orders for an aircraft that's here now, removing fuel-heavy birds from the fleet, while depreciating newer a/c. If Airbus 350XWB see's more delays, which is entirely possible, Boeing could see many more orders for 787. Any new aircraft is risky, even while in service. However, BA has to get credits for it's Vision and risk taking.

  • Report this Comment On September 27, 2011, at 5:40 PM, Canuck2010 wrote:

    What is the context of Boeing not making profits on the 787 until 2020? From the media reports I saw, that was the breakeven point where the gross profits would pay off the R&D expenses, not that each 787 would actually cost more to produce than the sales price.

  • Report this Comment On September 27, 2011, at 11:03 PM, mike994433 wrote:

    An increase of 4.2% and 2.5% in a market of high volatility is 'soaring'?

    Unfortunately, this article is par for the course for The Motley Fool, which is to say that it is completely lacking any content or insight. The author just writes a sensational headline, then makes some sweeping generalization (usually negative, because it's easier) and glosses over (or ignores) any relevant topics without doing even basic research, and calls it an article.

    I seriously think that Motley Fool authors are actually high school kids submitting articles to this 'content farm' for $3 a piece.

  • Report this Comment On September 28, 2011, at 2:40 AM, TMFDitty wrote:

    @Canuck2010: Tuesday's WSJ spoke of "positive gross margins on each airplane." Assuming the words quoted have their usual meaning, this would mean the sales price of a given plane will exceed the total cost to produce it. It does not appear to refer to just the cost of R&D and other development costs.


  • Report this Comment On September 28, 2011, at 4:27 AM, Flyboy225 wrote:

    Actually that's not the way it works. All development/start up costs are accumulated and amortized (spread out) over a number of aircraft. Boeing typically uses 200 or 500 aircraft blocs. Since the money is already spent, its a non-cash hit. The first 500-1,000 may be "profit less" from an accounting stand point but they generate cash (a lot of it!). Also, the faster you build them, the faster you burn through the bloc, the faster you can move to the next bloc where you show accounting profits. in the meantime, cash on cash profits are strong.

    That's why the institutional investors look to Boeing's cash generation as true measure of its health, not the GAAP EPS that is polluted by these factors.

    The article is wrong/misleading.

  • Report this Comment On October 10, 2011, at 2:31 PM, praizinplace wrote:

    TMF Diity wrote "My advice: Enjoy this week's gains while you can. They won't last long." on Sept 27th and here we are about 2 weeks later with BA closing in on the mid $ glad he has his finger on the pulse of this company...cost thousands of investors a very nice short term gain by listening to him...again.

    Thanks for the tragic impact Dooty, but I'ld drather go watch Shapespeare that this real world tragedy....again I say, oh so sad they allow people to spread this drivel to ruin portfolios around the should be censured.

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