by Susan J. Aluise | March 11, 2014 8:46 am
Boeing (BA) hit a patch of turbulence on Monday in the aftermath of this weekend’s disappearance of a Malaysia Airlines 777 and the unrelated discovery of cracks in the wings of 42 of BA’s 787 Dreamliners currently under construction.
Boeing stock was down more than 2% at midday on Monday as Boeing executives and a team of U.S. air safety investigators headed to Asia to help determine what happened to the Boeing mini-jumbo jet, which vanished early Saturday morning while en route to Beijing from Kuala Lumpur.
Although there has been no suggestion that the 777 is at fault — it has one of the best safety records of any aircraft type — it’s normal for shares of aircraft manufacturers to take a hit after one of their aircraft is involved in an accident.
But Boeing stock also is feeling the weight of more bad news from its troubled 787 Dreamliner. On Friday, Boeing discovered hairline cracks in the wings of 42 787 Dreamliners currently under construction. Cracks found in the 787’s revolutionary carbon-composite wings, manufactured in Japan by Mitsubishi Heavy Industries, have been attributed to a change in the manufacturing process.
Although no cracks were found in any of the Dreamliners that have been delivered to airline customers, the discovery of such a serious flaw basically ensures additional production and/or delivery delays in the 787 Dreamliner program. This is a big deal for Boeing stock because the company has aggressively ramped up production targets on the jet. A Japan Airlines 787 that had to make an emergency landing in Honolulu on Saturday was additional bad PR.
Boeing investors have seen the stock defy gravity before: After all, Boeing stock has gained more than 60% since the 787 Dreamliner was grounded over battery fires in January 2013. But although BA stock has been remarkably resilient over the past 15 months, sooner or later bad news will hit a critical mass that will send high-flying Boeing stock back to earth. Here’s why you should dump Boeing stock now:
#1 — New Dreamliner Production Problems: The good news: Boeing in January was able to boast production levels of 10 Dreamliners per month — the first time the 787 Dreamliner program was able to reach that target. That said, even before the discovery of wing cracks, Boeing was struggling with production “bottlenecks” with its flagship jet. Reports surfaced last month that the company’s South Carolina plant was struggling to keep up that pace and had been sending unfinished jets to BA’s union plant in Everett, Washington to be completed. In particular, problems with so-called “wiring bundles” prompted the Federal Aviation Administration to take notice.
#2 — Air India Debacle: Boeing has often characterized the 787 Dreamliner problems as “teething troubles” that are inevitable in the launch of any new aircraft type. Some airline customers — most notably Air India — are not buying the company line and have publicly demanded results. Since Air India took delivery of its first 787 Dreamliner in September 2012, its Dreamliner fleet has experienced 44 “major” engineering snags and 136 “minor” technical problems. Boeing is working with Air India to address the issues, but the airline is now demanding compensation for a wide range of issues — including the three-year delivery delay.
Safety Concerns Over 737 Automation: Last week, the Federal Aviation Administration announced that it was mulling new regulations to upgrade cockpit automation fixes in Boeing’s workhorse 737 narrow body jets. The new fixes, which would reduce the dangers of airspeed falling too low, would affect some 500 aircraft in the U.S. and hundreds more internationally.
Unusual Insider Selling: It’s always worth watching insider transactions, and we’ve seen some noteworthy Boeing stock trades by high-level company officials. In February alone, four key executives sold nearly 50,000 shares of Boeing stock, according to a report in Seeking Alpha. Boeing International CEO Shep Hill and Commercial Airplanes chief Ray Conner each sold about 15% of their BA stock; Chief Technology Officer John Tracy sold 19% of his holdings and CFO Greg Smith sold 9%. More concerning has been the lack of significant buying by Boeing insiders: Between January 2013 (when the 787 Dreamliner was grounded after battery fires) through February 2014, insiders bought only 1,500 shares of Boeing stock. Conversely, insiders sold nearly 651,000 BA shares in that same time frame. That doesn’t speak well of the prospects for Boeing stock.
Although I don’t believe these issues will crash Boeing stock, they do pose significant headwinds for the near future. BA stock has been on a tear lately because of the huge opportunity in commercial airplane sales and that value proposition remains intact.
That said, there’s too much air in Boeing stock now — and continued 787 Dreamliner troubles will likely inject additional uncertainty into the company’s high-potential launch of the 777X. If you own Boeing stock now, take profits. If not, wait for the dust to settle around Boeing stock, and see if you can buy in at a bargain this summer.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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