Investors admired the ambition, complexity, profitability and market dominance of industry leaders Fannie Mae ( FNM) and Intel ( INTC) all the way up to the point when their earnings forecasts were proven wildly overoptimistic and blew up. Could the same now happen at Boeing ( BA)? The parallels are eerie, if not at all perfect. Boeing -- the third-best gainer in the Dow Jones Industrials over the past year -- is priced for perfection, much as the techs and banks were in 2000. And perfection, as we know all too well by now, is rarely attained. Investors in the European consortium behind Airbus found that out all too well last month when executives had to backtrack from laughable assurances that production of their new super-sized A380 commercial aircraft was on track. The bad news sent the consortium's shares down 25% in a week. Boeing investors celebrated the Europeans' bad news, figuring it meant new business from frustrated Airbus customers. But really, they should have taken it as a warning, for it is very hard to believe that the U.S. aircraft maker will manage to escape a similar fate with the construction of its own new plane, the 787 "Dreamliner."
Sky-High OptimismBoeing rarely built a new aircraft on time when the planes were built start to finish in the greater Seattle area. But somehow it has managed to persuade investors that this time -- when much of the plane is being built overseas from hard-to-get materials and organized with a glitchy new software system -- Boeing cannot only keep production on schedule, but actually build planes at a record clip. A couple of analysts have been sounding the alarm, but have not made much of a dent yet with Boeing bulls. One bearish analyst, David E. Strauss at Swiss-based brokerage UBS, has told clients that the Dreamliner is even more likely to blow deadline than the Airbus A380. "Risk to the 787 production schedule will continue to increase from here as the program heads toward first flight in late summer 2007," he wrote.
If shares of Boeing do go into a nosedive over production delays, as I believe they will, bitter holders will shake their heads over the nosebleed altitude to which valuation has ascended this year. On a trailing basis, over the past 10 years Boeing's price-to-sales multiple has run from 0.69 to 1.1. It's now well above the top end of the scale. Boeing's price-to-book multiple has run from 3.5 to 5 over the past 10 years. It's now almost 6.Investors pay a premium for an industrial company's shares when they believe it is halfway through a business up cycle and recent earnings growth will extend at least three years into the future. They pay absolute top dollar when they think a company whose growth has been cyclical in the past has found a way to smooth out its ups and downs and bring in steadier cash flows through diversification efforts. So what are investors thinking? Forgetting the risk of production delays and the loss of face that would entail, steady cash flows could hardly describe Boeing, which is now, and will forever be, tied to the ups and downs of the worldwide demand for commercial and, to a lesser extent, military airplanes. With energy costs persistently high, global stock markets reeling, worldwide economic growth flattening and the threat of pandemic hanging over travel, the airline business does not look like an ideal place for investment capital at this time -- and that goes double for companies that provide capital equipment, like Boeing. The case for Boeing shares over the past three years has rested on its brilliant campaign to best its only major rival, Airbus, in obtaining orders for next-generation commercial aircraft. Airbus made a big bet on offering a gigantic new double-decker, wide-body jet that would transport up to 800 people at a time; Boeing made its own big bet on the 787, a more fuel-efficient aircraft that proposes to save airlines money. So far, Boeing has won the race for new orders by a handsome margin.