Boeing Hit With Worries

Earnings soar, but concerns about cost overruns and possible delays push shares lower.
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Updated from 7:59 a.m. EDT

Boeing

(BA) - Get Report

blew out third-quarter earnings estimates and boosted its guidance, but warned that work on its prized 787 Dreamliner has hit a snag.

The Chicago-based airplane maker said the new plane, eagerly awaited by the airline industry, is experiencing pressure "with respect to weight and supplier implementation" and said it will boost R&D spending by a total of several hundred million dollars in 2006 and 2007 to meet development challenges on the 787 and the latest version of the 747.

On a conference call, CEO Jim McNerney said, "We are at that point in the (787) program where weight remains a dogged issue. We are trying to witch-hunt the issues in this program right now."

Boeing said R&D spending will rise to between $3.1 billion and $3.2 billion in 2006 and between $3.2 billion and $3.4 billion in 2007, up from $3 billion. McNerney noted that the increased spending would enable the company to implement contingency plans: one, already funded, involves bringing systems installation work that had been done by a supplier back in-house.

McNerney that the first 787 will be delivered as scheduled in August or September of 2008. But concerns about the cost overruns and the possibility of delays pushed Boeing shares down $2.73, or 3.3%, to $80.86 in late-afternoon trading Wedneday, despite otherwise enviable numbers.

Consultant Scott Hamilton, who publishes an online newsletter about Airbus and Boeing, said the possibility of a delay cannot be discounted. "Boeing is throwing money and people and research at this to make sure it's not delayed, and at this point they may believe they can overcome their problems," he said. "But it's not uncommon for a new aircraft program to suffer some delays, particularly a program of this magnitude."

For the quarter ended Sept. 30, earnings fell to $694 million, or 89 cents a share, from the year-ago $1.01 billion, or $1.26 a share. Revenue rose to $14.74 billion from $12.36 billion a year earlier.

The latest quarter included a 22-cent-a-share charge for Boeing's decision to exit the Connexion wireless business. Excluding that charge, latest-quarter earnings were $1.11 a share on an adjusted basis. Analysts surveyed by Thomson Financial were looking for profit of 63 cents a share on sales of $15.07 billion.

Boeing updated its earnings-per-share guidance for 2006 to between $2.40 and $2.50 a share, as strong performance by its businesses offset termination charges for Connexion. The company also increased 2007 EPS guidance by 20 cents a share to between $4.45 and $4.65, reflecting the discontinuance of Connexion investment, contributions from the Aviall acquisition and other performance improvements. Revenue guidance for 2007 was increased to between $65.5 billion and $66 billion.

McNerney said Boeing hasn't yet made a decision on how to enhance its narrow-body program and expects to take "years, not months" to do so, given the continuing popularity of the 737. In its internal discussions, the company is considering airplanes with anywhere from 100 to 200 seats, he said.

"There's a lot of discussion, a lot of debate, different camps within our company," he said. "We're just focused on maturing the technologies that we know will fit into any of those versions as it clarifies."