bet on the 7E7 Dreamliner, its next-generation, fuel-efficient jet, will pay off in the eyes of Credit Suisse First Boston, which upgraded the company's shares on Monday morning.
CSFB analyst Jim Higgins upgraded Boeing to outperform from market-perform while raising his price target to $52 from $47, telling investors the 7E7 will drive future earnings growth. Boeing has already announced its international launch customer,
All Nippon Airways
, which placed an order for 50 planes, valued at $6 billion.
"The major change in our thinking on Boeing is higher confidence that the 7E7 will prove a success that will win substantial orders in coming years," said Higgins, in his research note. "A large number of 7E7-class aircraft are approaching retirement age -- our belief that the aircraft will serve the 'sweet spot' of airline industry profitability." (CSFB does and seeks to do business with the company covered in its research reports.)
In reaction, Boeing's shares rose 89 cents, or 1.9%, to $44.22.
As Higgins notes, Boeing's stock price has been historically driven by commercial aircraft orders, which peaked years ago, and Boeing has slipped to second place behind rival
, a unit of
. With critics blasting Boeing for its lack of innovation, the company is relying on the efficient, 217- to 289-seat 7E7 to drive growth. In contrast, Airbus has taken the bigger-is-better approach with its next-generation A-380, which seats 555.
But the 7E7, in Higgins' view, could be precisely what the airline industry needs at the perfect time. Not only does the 7E7 have the cargo space of the 777, it costs the same as the soon-to-be-eliminated 767, with operating costs that are at least 10% lower than both. And with a large number of 767s, 757s and Airbus A-330s set for retirement over the next five years, airlines will need to replenish their fleets.
"The ability to generate more revenue at lower costs should be a powerful combination in favor of the 7E7," said Higgins. "Indeed, while admittedly anecdotal, the feedback we're hearing from airlines regarding the 7E7's attractiveness is very favorable."
While the 7E7 seems likely to be popular with customers, none of the American carriers have placed an order yet. With oil prices high, airlines warning about bankruptcy, profits scarce and the cost of borrowing on the rise, the jury is still out on whether many airlines can afford the 7E7. But Boeing only plans to make 90 7E7's through 2009, which leaves time for the industry to recover and place orders for planes.
The success of the 7E7 is vital to Boeing future and its near-term stock price as well. Boeing's relationship with the government has turned rocky after a wave of scandals, imperiling a $23.5 billion contract to produce refueling tankers for the Air Force, which could force the company to take a $300 million charge.
With a slew of Pentagon reports recommending against the contract, analysts say the signing seems unlikely -- a view which Boeing disputes. Ultimately, Higgins feels the 7E7 may be able to offset the loss of the contract, if it happens.
"Risks remain that the 767 tanker will not win funding, with the likely domino effect of a cancellation of the 767 commercial program," said Higgins, "but Boeing is well able to absorb any such hit, and the 7E7 that holds such promise is the heir to the 767 market anyway."