Boeing Faces Chorus of Questions

Analysts want more information about the company's optimistic forecast.
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Boeing's

(BA) - Get Report

management will step back into the cross hairs during its annual analyst meeting Wednesday, with Wall Street focused on the status of a key $23.5 billion contract to supply the Pentagon with refueling tankers.

When Boeing released blowout first-quarter earnings and boosted earnings guidance on April 28, the company told investors it expected to win a contract to convert 767 passenger planes into refueling tankers for the Air Force.

But the political maneuverings around the contract has only intensified since then -- and analysts are already wondering if the company will have to take a huge charge to write it off. Indeed, in a filing with the

Securities and Exchange Commission

, the company warned it may have to take a $270 million to $300 million charge to terminate the program.

"I think they've been straightforward about the fact that writing it down is a distinct possibility," said Suzanne Betts, analyst at Argus Research Group. "But they have not wanted to give in unless they had to. We're still waiting for a final decision."

While a final decision on the fate of the 767 tanker contract is not in Boeing's hands, the company will likely face scrutiny on dwindling government support for the deal.

The Department of Defense's internal review of the contract seems to indicate that Boeing's odds of signing a deal are getting long. First, the Pentagon's inspector general recommended that the government explore alternatives to buying the tankers and said the current contract overcharged the government by $4.5 billion. Then, last week, the Defense Science Board said the Air Force lacks a "compelling material or financial reason" to buy the tankers, arguing they were unnecessary.

The two Defense reports are only part of the story. Last week, the House of Representatives' Armed Services Committee passed the 2005 Defense Authorization Bill, which set aside $95 million to expedite the Air Force's plans to lease and buy tankers from Boeing. But this support comes with a catch -- the Air Force would have to renegotiate terms of the contract and a panel of outside experts would have to review the deal.

The political point-and-counterpoint, much of which has taken place in the last three weeks, is expected to be the big issue on analysts' minds Wednesday. The fate of Boeing's line of 767 passenger jets, which the company plans to phase out, are also tied into the contract, since it provides the platform for the tankers.

"As far as the meeting goes, obviously people are going to be looking at the tanker contract and the political intrigue associated with that," said John Rogers, analyst at D.A. Davidson. "But I wouldn't expect any shocking surprises here. The meeting will be more about background, outlook and the basis for building assumptions the next few years."

In addition to the tanker deal, analysts will likely question some of the other assumptions built into Boeing's 2004 and 2005 earnings guidance, namely, that its commercial aviation business will pick up. While 2004 aircraft deliveries are expected to be at 285, the company said deliveries for 2005 will come in near 300, up from earlier predictions of zero growth.

But with oil above $40 a barrel, America's airlines are struggling.

Delta Air Lines

(DAL) - Get Report

has warned it may have to file for Chapter 11, while

US Airways

(UAIR)

appears to be headed back into bankruptcy protection. And while low-cost carriers continue to rely on the 737 for growth,

JetBlue Airways

(JBLU) - Get Report

has turned to Brazil's

Embraer

for its regional jets.

With America's airlines still posting losses, Boeing's future is being driven by international expansion. On Monday,

Gol Linhas Aereaes S.A.

, a low-cost carrier serving Brazil, ordered 15 of the 737s with an option to buy 28 more, a contract whose whole value is $2.7 billion. Earlier,

All Nippon Airways

became the launch customer for the company's next-generation 7E7 Dreamliner, buying 50 planes at a value of $6 billion.

"The 7E7 had a huge launch. I'm looking at that and maybe any additional orders the company has," said Betts. "The plane is actually pretty popular and people seem interested, beyond the initial purchase by All Nippon."

Indeed, Boeing's bet on the 7E7 is about to get more expensive as the company enters the final stages of research and development. With Boeing no longer the dominant player in the commercial aviation space, the success of the fuel-efficient 7E7 is critical to the future of the company and its dominance over the regional jets used to fuel the growth of low-cost carriers.

But while Boeing's comments about business could determine the near-term direction of its share price, analysts are also keeping an eye on a number of longer-term developments that could have major implications. One of the biggest is the company's evolving view of its business, which appears to be moving away from a totally vertical approach to manufacturing planes to one that focuses on design and final assembly instead.

As a result, the company could move to downsize and streamline its operations, selling sub-assembly plants to other defense contractors or spinning off the sub-assembly manufacturing business as a separate entity.

"An important issue is just the structure of this company. There are a lot of stories circulating about Boeing selling off some of the manufacturing operations, those sorts of things," said Rogers. "They're trying to go with what they believe are their core strengths."

Ultimately, Boeing's analyst call will be important for another reason: repairing the company's reputation on Wall Street. In April, a former Boeing executive pleaded guilty to a federal conspiracy charge investigating Boeing's bid on the Air Force tanker contract. The scandal forced the resignation of former CEO Phil Condit and CFO Michael Sears, paving the way for current CEO Harry Stonecipher to return to the company after retiring in 2002.

Since returning to Boeing at the end of 2003, Stonecipher has been running damage control, boosting the company's dividend and share-buyback program to sooth the jangled nerves of investors. On Wednesday, the company gets another chance to put its best face forward.

"So far, it's hard to say if he's done a really good or a really bad job -- it's really early," said Rogers. "He appears focused on the right things. In the past, when he's focused on something like that, it changes."