Congrats, Boeing, but Now Your Run Is Done
Sep 27th 2011 3:03PM
Updated Sep 27th 2011 3:04PM
Tuesday was a great day to be a Boeing (NYS: 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.
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 (NYS: UAL) , AMR (NYS: AMR) , and Delta (NYS: 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 (NYS: SPR) , General Electric (NYS: GE) , and Honeywell (NYS: 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.
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.
At the time this article was published 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.
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