CHICAGO (TheStreet) -- Dow leader Boeing (BA) - Get Report got a downgrade Wednesday, as Oppenheimer said the airplane maker's shares have reached its $140 price target and Oppenheimer revised its rating to perform from outperform.
A key problem is that as Boeing takes orders for the 777X, airlines have stopped ordering the 777. But the 777X won't be ready until 2020, assuming the new aircraft is on schedule.
"We believe investors are overlooking how a convergence of factors are aligning to make 2015 a medium-term peak," wrote Oppenheimer analyst Yair Reiner in his report. He said Boeing's investment in the 787 Dreamliner "should top out in 2015, but the call on cash is likely to be quickly replaced by investments in the 737MAX and 777X.
"Dreamliner deferred production costs are now expected to peak $5 billion higher and 18 months later than previously guided," Reiner said. The stock's rapid ascent this year reflects 787 deliveries and rising production, but those catalysts are now past.
Meanwhile, "2016 looks to bring a material drop-off in contribution from several key cash cow programs, including the 777, C-17, F-18 and V-22," he wrote, noting that Boeing "appears compelling" at 12.8 times 2015 free cash flow, but less so at 14 times 2016 cash flow.
Boeing closed Tuesday at $136.98. In premarket trading Wednesday, shares were down 93 cents. Boeing shares are up 82% this year, leading the Dow. Shares reached an all-time high of $142 in intra-day trading on Monday before starting a pullback.
Recently, everything has been going right for Boeing. At the Dubai Air Show, the company announced 259 orders for the 777X, with a list price of $100 billion, the largest commercial aircraft launch in history. The Dubai success was widely reported on Monday, triggering the share price gain.
But success can have a downside. "The launch of the 777X appears to have left the 777 program, which accounts for an estimated quarter of Boeing's total profit, in the lurch," Reiner wrote. Boeing booked 68 net 777 orders in 2012 but has only 42 so far this year. As a result, the 777 has only a 3.3-year order backlog, but the 777X won't be ready for seven years. That means production could decline to about 65 planes per year by 2018, down from 100 today, Reiner estimated.
Additionally, Boeing's defense business appears to be shrinking. Reiner said investors appear to have ignored the decline, but "that may be increasingly difficult to do going forward.' He said revenue from the C-17, F-18, V-22 and F-15 seems likely to shrink substantially by 2016. Overall, Boeing's free cash flow should peak in 2015 at $8.1 billion and then decline to $7.3 billion in 2016,
Another downside to success: It may have sparked Boeing's hubris. Two weeks ago, the company presented a wish list of a contract offer to 30,000 members of the International Association of Machinists, accompanied by the threat that Boeing would move 777X work out of the Seattle area if workers voted against the offer. Nevertheless, two-thirds of workers voted to reject the contrcat. Boeing said it is reviewing possible alternate sites.
Written by Ted Reed in Charlotte, N.C.
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