Boeing's Running Out of Fuel

As Boeing (BA - commentary - Cramer's Take) keeps flying high in anticipation of a recovery, the Chicago-based aircraft giant -- and its stock -- soon may have to land for refueling.

Don't get me wrong: Coming out of a recovery, a cyclical like Boeing will get its share of investor interest. In fact, its near-steady ascent from the late-September lows shows there's plenty of interest in the company's potential.

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Yet if you bought the stock near $30 on Sept. 21, it's time to think about cashing in your 50%-plus profits for frequent-flyer miles on one of its new 777 aircraft. With the stock lately at $45.90, there's nothing wrong with booking a solid gain here.

That's not to say Boeing can't move higher over time. In fact, if we have a normal recovery and economic cycle, Boeing could easily trade to $80 or $100 over the next three to four years. But it's just as likely the stock will trade sideways over the next several quarters because new commercial airline orders are probably at least a year away.

Even though passenger and freight air traffic is beginning to bounce back, the airlines continue to struggle financially from the sharp decline in traffic after Sept. 11 and from the lingering impact of a stagnant economy. If the sector's history repeats itself in the coming recovery, airlines will spend most of 2002 rebuilding traffic levels and most of next year stabilizing their balance sheets. Only after that will they begin to think about significant new aircraft orders.

While Boeing investors may push the stock higher in anticipation of new orders, another meaningful leg up isn't likely until commercial airlines begin showing additional signs of stability.

"The behavior of cyclical stocks earlier this year indicates that investors have been willing to look far in advance of the fundamentals," says Credit Suisse First Boston aerospace and defense analyst Pierre Chao. "But a major move in Boeing shares from the mid-$40s would imply a two-year jump on the cycle." Chao recently downgraded Boeing to buy from strong buy, and his firm has provided banking services for Boeing.

The good news is that commercial airline orders no longer appear to be declining. But deliveries probably will continue to trend lower over the next two years.

In recent guidance, Boeing said it would deliver about 380 aircraft in 2002 and between 275 to 300 aircraft in 2003. Deliveries aren't as important as future orders for the company's outlook, but combined with order cancellations and deferments, the data do suggest more near-term uncertainty about Boeing's commercial aircraft business.

For example, the smaller B717 aircraft -- a restyled, modern version of the DC-9 -- once thought to be a major part of Boeing's future remains in limbo as airlines reassess future orders.

Military orders are likely to make up for part of Boeing's commercial shortfall. This week's news that the Air Force may order up to 100 modified 767 aircraft to replace the aging KC 135 tanker fleet will keep Boeing plants in both Seattle and Wichita, Kan., busy. Additional work on intelligence projects, including the missile defense program and pilotless aircraft, will boost revenue at the aerospace giant.

Still, the stock's recent ascent assumes a lot of that good news. Boeing's long-term outlook appears bright, but if the consensus cyclical assumptions are accurate, its shares probably will level off at their current cruising altitude before building enough earnings power to soar meaningfully higher.

To read Glenn's take on Boeing, click here.

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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.