From a news standpoint, Boeing’s (BA) had a blistering year so far: three fires and a record 123-day grounding of its flagship 787 Dreamliner, the double whammy of lower defense spending and sequestration cuts and two accidents involving its planes in July — one of them serious.
But from a financial perspective, the defense and aerospace giant has never looked better. The stock is up nearly 40% this year and hit an all-time high in recent weeks. Plus, its recently released second-quarter earnings solidly beating Wall Street estimates.
So should you hop on board the stock? Well, despite the fact that BA has weathered turbulence extraordinarily well this year, ferocious headwinds remain … and have the potential to ambush shareholders.
Here are four early warning signals investors need to keep an eye out for in the coming weeks — signs that could mean it’s time to take your BA profits now.
More (or More Serious) 787 Glitches
After the lithium-ion battery failures on two 787 Dreamliners in January, BA engineered a fail-safe fix for the battery to prevent the possibility of the overheating. But investigators have not yet determined the precise cause of the overheating. A serious fire on an Ethiopian Airlines 787 parked at London’s Heathrow last month started near an emergency locator transmitter supplied by Honeywell (HON), but thousands of others have been used without incident.
Plus, Dreamliners operated by several other airlines — most recently Qatar Airways, Air India and Thomson Airways — have also experienced apparent electrical glitches. Boeing has taken the unprecedented step of constantly analyzing sensor readings of every 787 in the air in real time … but if the company doesn’t put an end to the Dreamliner’s “teething troubles” — or if serious problems with the model’s innovative electrical system emerge — Boeing shares could take a big hit.
Expensive Dreamliner Repairs
Repairing the Ethiopian Airlines 787 that caught fire in London last month likely will be more challenging — and expensive — than anyone has anticipated. See, the Dreamliner boasts a carbon-composite skin that is comprised of huge, barrel-type sections instead of riveted panels.
While rival Airbus (EADSY) also uses carbon-composite skin on its new models, it has opted for riveted panels instead of larger pre-fabricated fuselage sections.
This will be the first test of a major, large-scale repair on a composite-carbon fuselage … and a simple carbon-composite “patch” probably won’t fly. If the Dreamliner fails the affordable repair test, it could adversely impact future orders.
Asiana 214 Lawsuits
The NTSB’s investigation into the July 6 crash of Asiana Flight 214 in San Francisco last month is far from over, but the sharks (read: lawyers) already are circling. So far, four lawsuits have been filed against Boeing and the South Korean airline, as three persons were killed and scores of others injured in the crash of the 777 model wide-body jet.
Early indications suggest pilot error caused the jet to clip a seawall on approach and subsequently skid out of control and catch fire. But while there are no indications that the aircraft malfunctioned, BA is not necessarily off the hook. At least one of the suits alleges that Boeing provided inadequate training of its pilots.
Other Unexpected Headaches
Boeing faces other headaches, including compensation claims from 787 operators whose schedules have been disrupted by the fleet grounding earlier this year, as well as potential production snags stemming from key supplier Spirit AeroSystems’ (SPR) challenges.
Airline customers have been supportive of Boeing and its Dreamliner despite the recent glitches and grounding, but some of those relationships are showing signs of strain. After CEO James McNerney told analysts Boeing has finished paying out all compensation claims related to the 787’s grounding, LOT Polish Airlines spoke out, saying it had not yet been compensated for its losses. If other airlines take their disputes public, buckle up for a bumpy ride.
Spirit is also looking to sell off its Tulsa, Okla., plant — a move that potentially could impact component availability and production on several Boeing jets, including the Dreamliner and workhorse 737. And this is a particularly bad time for BA to face potential supply chain disruptions.
If BA backs off production targets later this year because of sourcing problems with Spirit — particularly those that involve the 737 or 787 — beware.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.