At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Wall Street warns: Boeing's turning into a boondoggle
It's hard to be a Boeing (NYSE:BA) fan, no doubt. The company lost another high-profile plane sales contract (to Hawaiian Holdings (NASDAQ:HA)) Monday, to rival airplane builder Airbus. As the days go by, it looks like Hawaiian's slipping farther and farther from the fold as it retires aging Boeing aircraft, and replaces them with Airbuses from the other side of the world.
Closer to home, a strike looms as negotiations with the SPEEA engineers union appear to be going nowhere fast.
Worst of all, problems with Boeing's vaunted 787 Dreamliner aircraft no longer appear to have been laid to rest by the plane's receipt of FAA certification. Well over a year into production, problems continue to crop up on the new wunder-bird, most recently a fire (and actual small explosion) aboard a JAL Boeing that had just landed in Boston.
The drumbeat of negative news has driven Boeing shares down more than 5% from where they closed just this past Friday, the healthiest price these shares have seen since last summer. Yesterday, the negativity even sparked a rare downgrade of Boeing, when investment banker BB&T said enough was enough, and pulled their buy recommendation on the stock. As the analyst exclaimed in exasperation:
Electrical problems with new aircraft are to be expected ... [Fires] or in flight diversions are not. The most critical aspect of any commercial aircraft's electrical architecture is the ability of the system to automatically detect, isolate and quarantine a problem well before it can reach the level of overheating ... [This] clearly did not happen in the incident in Boston yesterday, and absent more information from Boeing, we can only assume the other three electrical incidents are related to similar failings ...
Assembling the pieces
Now make no mistake -- I'm a fan of Boeing. At today's valuation of only 13 times trailing earnings, the stock looks like a bargain based on projected earnings growth rates that approach 12%, and a meaty 2.5% dividend payout. Add in the fact that Boeing is now generating free cash flow at a rate actually 4% faster than that at which it records net "profit" under GAAP, and the stock's even a little bit cheaper than it looks. But there is a danger here.
On the one hand, repeated incidents of fires, explosions, and other difficulties with early issue 787s has the National Transportation Safety Board sniffing around the planes, and reportedly mulling opening an official investigation into the plane's safety. This raises the risk of delaying production of Dreamliners, exacerbating the problem of a program that's already years behind deadline, and incurring delay-of-performance penalties from its customers.
Negative press from the Dreamliner's "technical difficulties" could furthermore dissuade new customers from signing on to order the plane, until Boeing has debugged it. Meanwhile, waiting in the wings as it were, Boeing appears intent on provoking a strike in its SPEEA engineers union -- a strike that even if it doesn't lose Boeing plane orders outright, will further delay production, and give new customers more time to ponder whether they really want to embroil themselves in this fiasco... or maybe just buy a nice, safe Airbus instead.
Foolish final thought
Given the risks -- delays, followed by potential cancellations and lost orders -- BB&T's decision to step to the sidelines and withdraw its buy recommendation on Boeing appears prudent. In fact, I'd go so far as to suggest investors should look even farther down the road, and reconsider whether they want to keep money tied up in the stocks of Boeing's suppliers, given the risks Boeing is creating for its supply chain.
As I've said before, big names like General Electric (NYSE:GE), Honeywell (NYSE:HON), and Spirit AeroSystems (NYSE:SPR) all have a lot riding on the Dreamliner's success. Each one supplies parts to the program. All share a certain level of "Boeing risk," perhaps we should call it, that problems at a key customer could disrupt their own operations farther up the supply chain.
Fact is, with 325 suppliers operating 5,000 factories to turn out parts for the 787, Boeing is beginning to look like it could pose a not-insignificant systemic risk to the American economy itself.
Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 347 out of more than 180,000 members.
The Motley Fool recommends Spirit AeroSystems Holdings. The Motley Fool owns shares of General Electric Company. 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.