Boeing Shares Up 43% as Demand Zeal Trumps 787 Trauma

CHICAGO ( TheStreet) -- Investors and analysts have decided that continued strong demand for Boeing ( BA) aircraft, not fears of the unknown, should define the share price.

Their confidence has made Boeing the second-best performing stock in the Dow Jones Industrial Average in 2013. Shares are up 43%, trailing only Hewlett-Packard ( HPQ), which is up 90%.

In recent years, the shares have performed unpredictably, largely related to concerns over delays in delivery of the 787 and then to concerns over the Federal Aviation Administration's decision to ground the plane due to unexplained fires in its lithium battery.

The cause of the fires in two aircraft remains unclear, but containment issues apparently have been resolved.

Boeing shares opened the year at $76.55. On Jan. 16, the day the FAA grounded the 787, shares opened at $73.85, close to the year's low of $73, which they reached in late January. The price has climbed since then, even when the airplane was grounded with no clear view of when it might fly again. By April 19, when the FAA gave the go-ahead to return to the skies, shares closed at $87.96. The stock closed Monday at $107.50.

Now, the story is all about demand. The world is hungry for large aircraft, and for the moment Boeing and Airbus are the only two major manufacturers. "The commercial aerospace sector is poised for accelerated growth in revenue, cash flow and earnings over the next several years," wrote Moody's bond analyst Russell Solomon in a report issued July 31. "Still-expanding order books will continue to be accompanied by advance payment-related cash flows."

"Greater deliveries of large commercial aircraft will soon outrun working capital consumption related to ramping production rates, driving even stronger growth in cash flow by 2014-2015," Solomon wrote, adding that the manufacturers will benefit from low capital costs and from declining R&D costs. Moody's has A2 stable ratings on both Airbus and Boeing.

While rising production rates for narrowbody A320s made by Airbus and Boeing 737s will match deliveries, given the strong demand, "it is the widebodies (mainly the 787 and A350 XWB) that will grow at a much faster clip, albeit off of a much lower base, and contribute most significantly to our expectations of accelerated revenue and cash flow growth," Solomon said.

What are the perceived risks? UBS analyst David Strauss wrote in a recent report that his firm sees the "risk to the sustainability of all-time high production rates at Airbus/Boeing," while Solomon noted that perhaps the most important constraint on the manufacturers' ability "to accelerate production rates is the supply chain, not lack of market demand. Monitoring suppliers and addressing problems will therefore remain a top priority.

"Although we have modest concerns about some of the larger, one-off orders placed in recent periods by less creditworthy, low-cost carriers, we believe that most of the strong demand for existing and next-generation aircraft by airline customers is wholly warranted," he added. "Further dispelling the notion of an aircraft 'order bubble' is the fact that the order book is increasingly well diversified, both from a customer and a geographic perspective."

Sterne Agee analyst Peter Arment said Boeing's share price can continue to rise "as investors grow more confident in the 787 execution, free cash flow and catalysts tied to the 777X launch and 787-10 accounting impact." Arment said he expects the 777X launch could occur at the Dubai Air Show in November. He has a "buy" rating and a $120 price target on the stock.

Last week, Boeing displayed the first 787-9 at its plant in Everett, Wash. While the 787-8 can carry 210 to 250 passengers on routes of 7,650 to 8,200 miles, the 787-9 can carry 250 to 290 passengers on routes of 8,000 to 8,500 miles. Boeing is slated to roll out and fly the second 787 model late this summer, with first delivery scheduled to Air New Zealand in mid-2014.

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

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