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.
Farewell, fair weather friend
This just in: Goldman Sachs is sick and tired of sticking to its "convictions." Since first recommending that investors buy Boeing (NYSE:BA) back in May of 2010, before the aerospace company's Dreamliner even received FAA certification, Goldman has stuck with the stock through thick and thin -- steadfastly enduring a 16-percentage-point drubbing by Mr. Market, convinced that Boeing would pull out a win in the end.
It's been especially rough going with Boeing these past few weeks, as a hailstorm of bad news regarding the Dreamliner has pelted the company. This culminated in yesterday's disastrous news that an All-Nippon Airways Boeing 787 was forced to make an emergency landing in Japan, after a battery error set warning lights to flashing across its console, and pilots noticed an "odd" smell in the cockpit. That incident led both All-Nippon and Japan Air Lines to ground their Dreamliner fleets, and last night, the U.S. Federal Aviation Administration announced that it, too, is ordering a temporary ban on Dreamliner flights while it conducts safety inspections.
Bad news all around
That was bad news for Boeing, which compounded Wednesday's 3.4% decline in share price with an additional 2% drop in market cap after the FAA announcement came out after close of trading. It's probably bad news for all sorts of Boeing suppliers, as well, from General Electric (NYSE:GE), which makes the plane's engines, to Spirit AeroSystems (NYSE:SPR), responsible for providing major fuselage sections for the aircraft, to even Honeywell (NYSE:HON), which supplies the Dreamliner's lighting systems. The longer Boeing's 787 program is kept on hold, the fewer plane parts these major suppliers will be able to sell to Boeing -- and the worse news for their revenue streams.
Most at risk (aside from Boeing itself, of course), is probably United Technologies (NYSE:UTX), which according to media reports is the contractor responsible for building the electrical unit that's been at the heart of several of the Dreamliner's safety incidents. An investigation focused on the safety of United Technologies' products could necessitate costly redesign work for the company, or even cost it the contract.
Narrow focus on a wide-body
For the time being, Goldman is focusing primarily on Boeing itself. On the one hand, the analyst continues to argue in favor of the company's "fundamentals" -- its strong earnings and cash flow growth, its recent decision to reinstate share buybacks and increase its dividend, and of course the stock's seemingly attractive P/E ratio of just 13.1. That's why, even though Goldman has stricken Boeing from its "conviction buy" list, the analyst still calls Boeing a buy of a stock.
Regarding the Dreamliner's groundings, and FAA inspection, Goldman takes Boeing management at its word, and describing the plane's multiple safety malfunctions as mere "teething," common in new airplanes. That said, the analyst worries that "meaningful" redesign changes could be required of Boeing, and that this could slow the rate of Boeing's planned production ramp -- issues that should, again, alert investors to the potential for risks among Boeing's suppliers.
As for me, I remain of the opinion that Boeing's problems are fixable, but that time is running short. Leave aside the question of how serious a technical task it will be to fix the plane's electrical problems. Right now, Boeing is still busy angering the very engineers it will depend upon to fix the problem, as it hems, haws, and delays signing a new contract with its SPEEA engineering union.
That's not just bad labor relations. In the context of the Dreamliner program's meltdown, it's a downright irresponsible business decision.
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. 349 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.
More from The Motley Fool
Boeing Co.'s Dreamliner Profitability Is Set to Soar
An improving production mix, lower supplier pricing, and a looming increase in output will all drive the 787 Dreamliner program's profitability higher in the next few years.
SpaceX's First Manned Spaceflight -- Delayed!
Boeing will launch late, too.
Boeing Takes Another Step Toward Vertical Integration: Should Suppliers Panic?
The aerospace giant is moving into some of the most lucrative parts of the aftermarket. That's bad news for suppliers.