Boeing Stock: Too Far Too Fast?

Boeing shares, which closed Thursday at $61.56, up 40 cents, have climbed about 28% since the start of November, and analysts are pulling back.
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) -- Has


(BA) - Get Report

stock risen too much too soon?

The first test flight of the 787 last month embodied soaring hopes, as 2 million people watched on the Web. For a few hours, at least, few cared that the long-awaited aircraft is two years behind schedule. Investors certainly shrugged off the concern.

"In the stock now is the assumption that the test program will be successful," said FTN Equity Capital analyst Mike Derchin. Shares, which closed Thursday at $61.56, up 40 cents, have climbed about 28% since the start of November, including a 10% jump this year.

That is "2 Fast (and) 2 Furious," suggests Macquarie Securities analyst Rob Stallard. "We think it unlikely that 2010 guidance will provide much upside to current consensus estimates, with cash flow particularly challenged, and only cautious optimism about the current demand environment for new aircraft," Stallard wrote, in a recent report. He downgraded Boeing from outperform to neutral while raising his target price from $60 to $66.

A day earlier, Standard & Poor's analyst Richard Tortoriello reacted differently to the share price run-up. He reiterated a buy and raised his price target from $60 to $72. "An improved economy and credit markets will help support delivery of Boeing's 3,376 aircraft backlog," Tortoriello wrote. "Despite receiving over 4,000 orders from '05 through '08, and despite a severe downturn resulting in huge losses for airlines, Boeing received 263 gross orders in '09 (142 net following cancellations)."

Boeing revenue, approximately $61 million in 2008, is split nearly evenly between commercial aerospace and defense. Tortoriello says he is positive on the former and negative on the latter. "We see definite signs ofimprovement in the global economy and the beginning of growth in commercial air traffic," he wrote. "However, we also believe that high levels of deficit spending in the U.S., pending national health care legislation, and rising social spending in general will mean increased pressure to cut the U.S. defense budget in the future."

Broadpoint Amtech analyst Peter Arment believes shares have risen enough, given a recent decline in aircraft orders. After all, in 2007, the company had 1,423 gross orders. "The order downturn should last about three years," Arment wrote, and Boeing's "earnings power is likely flat for the next two years." Arment said he prefers aftermarket companies like

Precision Castparts



Derchin also believes that shares have risen enough: He has a neutral rating. "We're at the stage right now where orders are on the cyclical downside of the boom-bust cycle," Derchin said, in an interview. "It will be a while before we see a pickup." Meanwhile, he said, the defense business will likely be flat to modestly down -- and shares could languish for years.

>>Photo Gallery: 787 Dreamliner

It could be that the next big stimulus to aircraft orders -- and to Boeing stock -- will be development of a next-generation narrow-body aircraft to match the fuel-efficiency gains of the wide body 787.



said recently it will consider a narrow-body purchase.

"Certainly United would want whatever the latest technology is," Derchin said. "Already, there are multiple pressure points from airlines around the world to develop one. If you could ever get an order cycle going for single body aircraft, that would be tremendous" for Boeing.

In sorting out Boeing's prospects, it is useful to review the shares' 2009 performance.

During 2009, Boeing shares traded all over the map, hitting a low around $29 in March and a high near $57 in December. For the year, shares were up 26%, slightly ahead of the 23% gain registered by the

S&P 500

. In March, traders feared that the 787 would be delayed and that production would be cut back as airlines, unable to secure financing, pulled orders.

The fears were justified in the first case, but it turned out that production cuts were minimal. Boeing cut back monthly production of the 777 from seven to five a month, starting in June 2010. Additionally, production rates for the 767 and 747-8 remained static, rather than rising as planned. But production of the 737, which accounts for the vast majority of Boeing deliveries, was not impacted.

In the end, Derchin said, it is important to remember that Boeing is somewhat insulated from short-term ups and downs of the economy by its monster backlog. In fact, one simple fact probably overrides the myriad concerns about the company, which is that as the world emerges from a deep recession, it remains hungry for large aircraft. Boeing, one of the world's two manufacturers, still has 3,375 orders, a backlog equal to more than six years of production.

-- Written by Ted Reed in Charlotte, N.C.