Buy, Sell or Hold: Japan’s Disaster Will Create More Turbulence for The Boeing Co. (NYSE: BA)
The Boeing Co. (NYSE: BA) is one of the largest defense companies on the planet, and it’s the backbone of commercial air travel in the United States.
However, the production of the company’s signature product – the vaunted 787 Dreamliner – has been delayed countless times, costing the company revenue and credibility.
Now, it’s likely to see even more delays as a result of the terrible disaster in Japan.
In my mind, that makes Boeing stock a “Sell” (**).
Boeing spent the last decade designing and building the next generation in commercial aircraft.
The 787 Dreamliner was designed to carry passengers farther distances, in greater comfort, while consuming less fuel. It incorporates a significant number of new technologies into its design.
However, the challenge of incorporating these technologies has caused Boeing to miss deadline after deadline. In fact, the current test aircraft caught fire during a test flight last fall and had to make an emergency landing.
The 9.0 earthquake in Japan is the latest event to adversely affect Boeing’s schedule of Dreamliner deliveries. Japan is a major supplier of key sub-modules for the airplane. These parts are built in Japan, and shipped to America for final assembly.
It is an understatement to say that Japan will be busy rebuilding its damaged infrastructure for quite a while. The rolling blackouts will most likely keep some of the highest technology off line, until guaranteed supplies are available.
Boeing subcontractors are already speaking to the media about how they will be affected by availability of gasoline, among other things.
“There is the potential for future parts shortages with a small number of suppliers related to their sub-tiers suppliers and/or infrastructure impacts,” Doug Alder, a spokesman for Chicago-based Boeing, recently told MarketWatch. “We are working through each of these risks and developing plans to mitigate their impact.”
Considering the continual slippage in the 787 Dreamliner, there is no reason to believe that Boeing will be able to start hitting its deadlines ? especially since the company was experiencing delays in all of its major new product lines long before the tragic events in Japan. This has already caused a negative earnings growth cycle.
Boeing last month announced it had beat out European Aeronautic Defense & Space Co. (EADS) – the company that builds Airbus planes – for a contract to build a fleet of U.S. Air Force refueling tankers. However, that surprise win already has been fully priced into the company’s stock.
Boeing stock has a 52-week range of $59.48–$76.00. It closed Friday at $69.07, giving the company a Price/Earnings (P/E) ratio of 15.5.
The company has a market cap of $50 billion with an Enterprise value of $53 billion once net cash and debt are accounted for. It generated $63 billion in revenue during the trailing twelve months.
To summarize Boeing’s situation:
- It is already three years behind schedule on its 787 Dreamliner.
- The Dreamliner will likely see further delays as a result of the tragedy in Japan.
- The company also is experiencing delays with its modernized 747 program.
- It has negative earnings growth over the trailing twelve-month timeframe.
- News of the newly won airborne tanker contract is already priced into the stock.