Investor Dilemma: The Boeing 787 Dreamliner

Alvin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Boeing Company (NYSE: BA) is facing problems with the 787 Dreamliner. On January 16, the Federal Aviation Administration (FAA) issued an Emergency Airworthiness Directive and grounded all 787s operated by US carriers. The only US carrier affected by the directive is United Continental Holdings (NYSE: UAL), which operates six 787s. All 787s have been grounded by regulatory agencies worldwide. However, the 787 is a new aircraft and only 50 have been delivered by Boeing so the impact of the groundings on carriers is relatively small.

All Nippon Airways, which is the most impacted carrier, has seventeen 787s in its fleet, but expects only a small impact on earnings. In comparison, United Continental operates only six 787s with plans to get two more this year. According to United Continental's FY 2011 10K report, at the end of year 2011, the company owned or leased 156 wide-body and 545 narrow-body aircraft. Thus, the 787 is a very small part of its fleet. In addition, despite the groundings, United Continental CEO Jeffery Smisek continues to back the Dreamliner and called it a "world-class product." The small impact on its customers and Boeing's good reputation are some of the few positives it has going for it in this situation.

Hold off on Boeing

The investigation into the 787 is focused on the aircraft’s lithium-ion batteries. In the directive, the FAA states, “This emergency AD was prompted by recent incidents involving lithium ion battery failures that resulted in release of flammable electrolytes, heat damage, and smoke on two Model 787-8 airplanes.” Before the groundings, a battery ignited in a parked Japan Airlines 787 and an All Nippon Airways 787 performed an emergency landing due to a battery warning and an odd smell in the aircraft.

Looking at developments and the company’s current valuation, investors should probably hold off on adding to their investment in Boeing. The company has a PE ratio of 13.3, which is not a bargain, and problems with the Dreamliner. Check out the following one year chart for Boeing.

<img src="http://media.ycharts.com/charts/a3cc14df624e8c9fcd6406d019b68cec.png" />

BA data by YCharts

Boeing’s stock price has barely declined since the groundings. At a PE of 13.3, investors could be underestimating the problem with the 787. The last time the FAA grounded an aircraft model was 34 years ago in 1979. Also, the US National Transportation Safety Board (NTSB) has not yet determined if the problem is only the battery or if other systems are involved. In addition, a large part of Boeing’s future rests on the Dreamliner. The company estimates that the market size for the 787 Dreamliner is 3,300 units from year 2011 to year 2030.

The 787 and Boeing’s future

Through December 2012, Boeing has 799 unfilled orders for the 787. The 787 has the second most unfilled orders trailing only the 737. The average 2012 prices for the 787 range between $206.8 million for the 787-8 and $243.6 million for the 787-9. On the other hand, the price of the 737 ranges between $74.8 million and $107.3 million.

Using the 2012 numbers for the 787, the revenue backlog for the 787 can be estimated at about $177 billion. At the end of Q3 2012, Boeing had a total contractual backlog of $358 billion. Also in the first nine months of year 2012, Boeing’s Commercial Airplanes business generated about 59% of the company’s revenue and 74% of the company’s operating income. The 787 is a big part of Boeing’s future.

Despite its problems, there are good reasons to be bullish on the 787. The 787 uses 20% less fuel than similarly sized commercial aircraft and travels at a similar speed as a 777 or 747. The 787 is built with 50% composite materials and uses an electric architecture, which requires 35% less power than traditional hydraulic and pneumatic systems. At Boeing’s website, the company calls the Dreamliner “the most successful twin-aisle launch of a new commercial airplane in Boeing's history.”

A good company with a big unknown

Problems with the 787 are not new. The first flight of the Boeing 787 was delayed by over two years. The delays were the results of parts shortages, other problems with the supply chain, and a structural weakness. Taking into account the history of the 787, investors should be careful not to underestimate the current problem. There are a lot of unknowns and the solution could be simple or complex. Overall, unless the stock price makes a massive move in either direction (at which point investors could take advantage of a bargain or an overpriced situation), the best move is probably to sit tight and wait for the conclusions of the investigation. At this price level and at this point of the investigation, Boeing is a hold.


iamgreatness has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus