Why so glum? Shapiro says new planes containing significant technological innovations inevitably encounter manufacturing problems. Already, Boeing has acknowledged that the 787 is overweight, and with a big advance in electronic complexity, my guess is that some variation of the wiring snafus that have tripped Airbus are virtually a lock to appear.
It's precisely due to manufacturing crises that Boeing shares have typically underperformed during development cycles and outperformed once planes are finally delivered. The company ultimately fixes the problems, of course, but the solution comes at the price of higher research costs that depress profit margins.
Meanwhile, investors are treating orders as if they were booked revenue, even though past cycles have seen up to a third of orders canceled. Although some 787 orders are still coming in, many were made in an environment of much lower oil prices and interest rates, and stronger economic growth.
You may recall that, in early 2000, tech companies boasted that tremendous order backlogs would lead to fantastic earnings growth, only to learn later that buyers had speculatively double- and triple-ordered. Jets also are ordered by companies that speculate on traffic boosts that never materialize. Citigroup notes that the Indian market is seeing air traffic grow by 20%, while capacity is expected to grow by 30% -- an imbalance that increases the likelihood that price wars will sap profits and lead to cancelled orders.
If cracks appear in Boeing shares' uptrend, the stock could come in for a hard landing.
So what are the shares really worth, considering the risk? Boeing has historically traded at anywhere from a 50% discount to a 50% premium to the
aggregate price-earnings multiple. Since the index multiple is around 16 and Boeing's multiple is at 25, it's now trading at a 55% premium. Were the multiple to contract to parity with the broad market and earnings were to come in at consensus 2006 estimates, shares would be worth $56, or 35% less than the current quote. And if the schedule slips and the company disappoints on earnings, well, sky-high is not the word that would be used for either the multiple or the price. Personally, I'll take an aisle seat in coach.
And one last note: If the Boeing story falls apart, also look for fallout in the shares of the many public companies that supply components as well, including
, carbon fiber composite maker
, cabin maker
, parts maker
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