Sunday, December 9, 2012

4 Reasons to Doubt Boeing’s Bullish Outlook

Boeing (NYSE:BA) recently predicted at the Paris Air Show that the global aircraft fleet will double by 2030 — amounting to a whopping $4 trillion market. While that number reflects extraordinary growth, it�s more than possible — if Boeing is right and annual airline passenger traffic grows 5.1% over the long term.� After all, the Asia-Pacific aircraft market alone could reach as much as $1.5 trillion and represent one-third of worldwide deliveries.

Unless a big deal crops up in the next few days, Boeing�s visit to Paris may be less pleasant than it had hoped.� The company had sold just two planes in Paris by late Friday � a pair of 737-800s from Mitsubishi�s aircraft leasing unit.

The company�s rival, Airbus, however, sold more than 100 planes by day�s end � and is expected to announce a record 200-jet, $17 billion order from Malaysia�s AirAsia next week.

Here are four reasons Boeing�s optimism about the coming $4 trillion market � and its own position in that market � might be slightly overblown:

  • Revamp The 737 Or Build New? The Boeing 737 narrowbody is the most popular jet in the world � nearly 9,000 have been delivered since the model made its maiden flight in 1967. But the company must make some tough decisions fast if it doesn�t want its past success to undermine its future.� The company has been torn over whether to revamp and re-engine the 737 or to design a new single-aisle model from scratch. With a growing number of airlines placing orders for rival Airbus� A320neo, Boeing may not be able to postpone its decision much longer.
  • The 787 Dreamliner Nightmare May Not Yet Be Over. Even Boeing Chairman and CEO Jim McNerney now admits that the delay-plagued 787 Dreamliner program will lose more money at the start than any aircraft launch in the company�s history. The 787 is three years behind schedule, and Boeing hopes to deliver its first plane to All Nippon Airways in the third quarter of this year.� But that production target may be threatened by a federal labor complaint against Boeing that seeks to force the company to end nonunion production in South Carolina and move it to a unionized plant in Washington state. The National Labor Relations Board complained that Boeing moved Dreamliner production to the right-to-work state in retaliation for past strikes.� With Congress and the courts now entangled in the imbroglio, further 787 delays are likely.
  • Will The French Government Play Fair? Air France-KLM and the Iberia-British Airways budget carrier Vueling Airlines have come under pressure from French officials to favor Airbus over Boeing on billions worth of new aircraft orders.� French legislators have launched an �economic patriotism� campaign to try to get Air France-KLM to buy 100 long-range jets from Airbus. Vueling CEO AlexCruz said it could be difficult for his airline to make night flghts into Paris� Orly Airport if the carrier chose Boeing�s 737 over the Airbus A320.� The government pressure could be retaliation for the recent $30 billion refueling tanker deal the U.S. Air Force awarded to Boeing.
  • There�s Competition From China, Too.� Dublin-based discount carrier Ryanair (NASDAQ:RYAAY)�has said it will work with China�s state-owned Commercial Aircraft Corp. on the C919 narrowbody jet.� Ryanair currently is one of Boeing�s largest customers.
  • Bottom Line: With a market cap of nearly $55 billion, a P/E of 16.38 and an EPS of $4.53,� Boeing�s fundamentals are solid.� The company has an insanely high return on equity of more than 98% for the past 12 months and a net profit margin of 5.28%.

    But like all aviation, defense and aerospace stocks, Boeing faces potential headwinds.� The company faces competition from Airbus, which has now soared into the top sales spot, and emerging manufacturers like Comac. Boeing still has many unanswered questions about its future plans and the sluggish economic recovery may dampen that $4 billion forecast significantly.� After all, a lot can happen in 20 years.

    As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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