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Boeing Delay Buoys Skeptics

Shares fall again the day after it pushes back 787 deliveries.

Now come the doubts about


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Perhaps it should have been clear in July that this uber-company was living a dream that could not possibly last.

In the second quarter, Boeing beat estimates for the third time in a row. Its stock reached an all-time high, its 787 Dreamliner was the hottest prospect in aviation history and its order backlog was four times annual revenue. And, for good measure, its only competitor had recently imploded.

Boeing came back to earth Wednesday, saying the 787 will delayed six months until November or December of 2008. Its shares fell only about 3%, significant but still a sign that investors had largely factored in a delay, even though, just a few days earlier, a Boeing executive told reporters in Australia the plane was on schedule for May delivery.

Boeing shares also fell Thursday, losing 2.5% to $96.26. Now, they're down about 10% since the July high -- which was nearly reached again last week.

So Boeing is no longer invincible. The questions will become edgier, the skepticism higher.

"You can't rule out the possibility there could be more delays," says aerospace consultant Scott Hamilton. "Boeing may be absolutely confident that they have everything in hand now, but they don't really know what else might come up. You don't know what you don't know."

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When Boeing made the announcement, Francois Parenteau, manager of the New York-based Defiance Fund, wasted no time. Defiance, a small hedge fund with assets of $25 million and a 23% year-to-date return, shorted 5,000 shares of Boeing. The fund is now short 10,000 shares at an average price of $88.

"With the 787, Boeing embarked on its most complex project ever," Parenteau said, in an interview. "It is the first composite plane, and it is being built internationally with suppliers all over the world, and all of this has to come together."

In Parenteau's eyes, Boeing has sought to maintain that deliveries are on track in order to keep customers from moving to competitor Airbus. Airbus may have had problems, but it is rebounding. The first A380 jet will be delivered Monday to Singapore Airlines, about 22 months late. The A350 XWB, a rival to the 787, is scheduled for deliveries in 2013.

To be sure, Parenteau has been skeptical for a while. In a report to shareholders in July 2006, he wrote "Investors who keep on dreaming that Boeing will deliver this plane on time and with no hiccups haven't learned anything (from the A380 delay). Industrial projects of this complexity are rarely completed on time."

At that time, he sold 5,000 shares short at $81. "Very often we are a bit early," he confesses. "I have to get better at waiting, but I am more confident than ever."

Generally, Boeing has been forthcoming about its problems, which has helped it to maintain credibility. Investor confidence was buttressed Thursday when Standard and Poor's said it has maintained Boeing's A+/Stable/A-1 rating.

"We do not expect the delay to significantly affect Boeing's forecast earnings in 2007 and 2008, which are benefiting from solid performance in all business segments," S&P said.

Nevertheless, there are chinks. Hamilton said it is now clear that the rush to roll out the airplane on July 8, 2007 was an instance where "public relations and marketing took control of the process." The plane displayed to the world was put together with thousands of temporary fasteners, but it turned out that documentation was lacking.

"They basically had to take it apart and put it together again," he says.

Still, Boeing remains ahead of Airbus on the credibility scale, Hamilton said. Besides incurring A380 delays, Airbus cancelled production of an earlier A350 version scheduled for delivery in 2011. One might assume the week's events have brought smirks at Airbus, but spokesman Clay McConnell says the emotional response is not so simple.

After all, he notes, "We're familiar with the impact a program delay can have."