Boeing Shares Dip on Dreamliner Issues--Good Time to Buy?

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After a series of glitches, such as fuel leaks, problems with the battery, electrical fires, cracked windows, and problems with brakes, the plane giant Boeing (NYSE: BA) got a red signal from the US Federal Aviation Administration (FAA) on Thursday. Boeing’s flagship aircrafts, the 787 Dreamliners, have been witnessing technical and electrical mishaps, and the regulator and airlines using the airplanes have decided to ground the Dreamliners and review the aircraft’s systems.

The FAA issued an emergency airworthiness directive, according to which US airlines using the 787 Dreamliners need to temporarily cease operations. The agency also recommended other regulatory agencies to follow suits. As a response to the step taken by the FAA, Boeing Chairman, President, and CEO Jim McNerney made the following statement:

The safety of passengers and crew members who fly aboard Boeing airplanes is our highest priority. Boeing is committed to supporting the FAA and finding answers as quickly as possible. The company is working around the clock with its customers and the various regulatory and investigative authorities. We will make available the entire resources of The Boeing Company to assist. We are confident the 787 is safe and we stand behind its overall integrity…Boeing deeply regrets the impact that recent events have had on the operating schedules of our customers and the inconvenience to them and their passengers.

The 787 Dreamliners are the company's most fuel-efficient airliner and the world's first major aircraft to use carbon-composite materials for most of its construction, which enables it to perform at par with other similar-sized aircrafts but consume 20% less fuel. So far, Boeing has delivered 50 Dreamliners and almost all of them have now been grounded. BBC pointed out that out of these 50 787s, All Nippon Airways owns 17, Japan Airlines owns 7, United Airlines (NYSE: UA) and Air India owns 6 each, Qatar Airways owns 5, Ethiopian Airlines owns 4, LAN Airlines owns 3 and Lot Polish Airlines owns 2 aircrafts.

A few days ago only the FAA had declared the aircrafts to be safe. But, after Wednesday’s emergency landing of All Nippon Airways’ domestic flight 692, which was headed to Haneda Airport near Tokyo from Yamaguchi in western Japan, due to a battery failure, the FAA issued the emergency airworthiness directive. Among the airlines, United Airlines is the only US player that has been flying the 787s and the company has announced that it will stop operating the aircrafts and conduct a thorough check. Even ANA and Japan Airlines, which together account for almost half of the 50 Dreamliners, have already grounded all of their Dreamliner fleets. Unless the aircrafts can demonstrate to the FAA that the batteries are safe and in compliance, the FAA will not grant the permission to put the 787's back in service.

Shares of Boeing plunged as much as 3.4% as the Dreamliners were grounded. However, though all this is having a negative impact on the stock price of Boeing, I feel all this also represents a good buying opportunity for investors. Industry experts and analysts feel there is huge potential in the company and the stock can be a valuable addition to one’s portfolio. 19 out of 26 polled investment analysts are recommending the stock, while 5 are voting for “hold,” and only 1 analyst thinks it’s a good idea to end a position in Boeing.

Coming to the company’s performance and stock performance, analysts are expecting the company to sport a quarterly top-line growth of 11.26% and an annual growth of 18.59%. Currently, the company is trading at $74.34, near its 52-week high of $78.02, but chances are high that the figure will shoot up further. As per CNN Money, 22 analysts offering 12-months price forecast for Boeing have a median target of $87.00 (representing a 17% surge from the current price), with a high estimate of $104.00 (up 39.9%) and a low estimate of $68.00 (down 8.5%).

(Source: CNN Money)

(Source: StockCharts.com)

Now, from a relative view point Boeing is looking like a good investment. Boeing is currently trading at a price-to-earnings ratio of 13.1, which is much lower than Textron’s (NYSE: TXT) 18.4. Both the players are from the same industry and are thus subject to the same growth prospects. The present price of Boeing represents a strong entry point, as the stock is much cheaper than Textron’s, but offers similar growth prospects. Plus, Boeing has its own growth prospects. If the stock price hits the expected median of $87.00, that will result in huge gains for investors. However, Textron’s stock is already looking expensive, and thus it might not be able to provide its investors with equal growth.

(Source: CNN Money)

The fact that Boeing is having issues with its 787 Dreamliners does not show there is anything wrong with the fundamentals of the company. It is manufacturing beautiful airplanes, out of which a few have had minor hitches. These minor issues reflect very natural problems that can happen to any machine and are not a result of manufacturing or design defects. Boeing has already delivered 50 Dreamliners and it has to deliver another 800 aircrafts, which can take years. This shows there is huge demand for its flagship offering.  The core is strong and the future is looking good. I think this is what a fundamentally strong investment decision is about. The company is going to report its earnings on Jan. 30, and investors need to look out for that.


analyse360degree has no position in any stocks mentioned. The Motley Fool recommends Under Armour. The Motley Fool owns shares of Textron and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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