Investors who stood by Boeing reap reward

Investors who stood by Boeing during its 787 crisis have been rewarded.

Things looked bad three months ago. Boeing’s flagship plane was grounded worldwide because no one could explain the smoldering batteries on two different planes. Deliveries of the 787 to customers had stopped. No one knew how much the whole mess would cost. Plus, there was a chance engineers could strike, halting production.

Some investors bailed out, spooked by the latest snag with a plane considered to be a key to Boeing’s future. Others were confident that Boeing Co. would quickly fix the battery problem and raved about its long-term prospects.

“Over time, when investors are terrified, you’re usually going to be able to find some very good buying opportunities,” said Don Peters, portfolio manager for T. Rowe Price’s tax efficient equity fund.

On Friday, federal regulators approved Boeing’s battery fix, clearing the way for the plane to fly again, although the timing remained uncertain. The shares rose 2 percent to close at $87.96 on Friday, and are now up almost 17 percent for the year.

The stock has outpaced the gains that brought new record highs for the Dow Jones industrial average and the Standard &Poor’s 500 index. Anyone who bought 100 Boeing shares at the January low of $73.65 is sitting on a gain of $1,431, or 19 percent.

In January, T. Rowe Price analyst David Rowlett concluded that Boeing’s 787 problem was serious, but manageable.

He said the hardest part for Boeing with the 787 had been the years of production delays before the plane finally went into service in late 2011. At the time of the grounding, only 50 787s had been delivered, limiting any compensation owed to customers for the planes being out of service.

“It’s been a tough few years for this platform and for Boeing, but I feel like we’re close to the finish line on the 787,” Rowlett said. A bigger concern, he said, was that engineers would reject a contract offer and walk out. That could have stopped production of all Boeing planes. Instead, they approved a deal on Feb. 19.

Long-term, Boeing has plenty going for it. There’s growing demand from the world’s airlines for more planes to expand their operations or replace older planes with modern, fuel-efficient aircraft. The company has a steady stream of revenue locked in with a backlog of orders for almost 4,500 planes.

That includes 840 787s. The Dreamliner, as the 787 is known, is Boeing’s first all-new airplane since the 777 in 1995. On the outside, it has an advanced carbon-fiber skin (instead of the usual aluminum). On the inside, it uses far more electricity than other airliners. That adds up to a plane that can save the airlines money on fuel, which is now their biggest cost.

As popular as it is, the 787 isn’t Boeing’s best-seller. The bulk of orders are for the 737, the world’s most widely used aircraft. And the longer-range 777 is also selling well. Boeing is boosting production of both to catch up with orders.

It also helps that Boeing faces only one serious competitor — Airbus. Even with the 787’s woes, the plane is ahead of Airbus’ competing A350, which hasn’t flown yet and won’t be delivered until next year at the earliest.

Boeing still faces some issues. The final price tag for the 787 battery problem isn’t known. The battery issue has strained relations with customers already frustrated by the 787’s three-year delay in initial deliveries. And weak demand for its superjumbo 747-8 forced Boeing to slow production of that plane.

Still, some analysts think Boeing shares could top $100 — and even top the high of $107.83 set in 2007. They’ve concluded that Boeing shares are under-valued compared to its ability to generate cash.

Analysts expect the cash produced by Boeing’s operations to rise from $7 billion this year to $8.5 billion in 2015, according to FactSet. The biggest generator of that cash will be increasing deliveries for commercial planes.

Investors will share in the bounty. Boeing plans to buy back $1.5 billion to $2 billion of shares in 2013. Sterne Agee analysts Peter Arment and Josh W. Sullivan noted Boeing bought back and retired $9.1 billion in stock, or 15 percent of outstanding shares, from 1998 to 2001, another period of strong deliveries. The two analysts estimate that Boeing could retire 10 percent of its shares over the next two years. The appeal of buybacks is that they boost earnings per share.

Boeing is also boosting its quarterly dividend 10 percent, to 48.5 cents per share. That means investors will get a return of 2.3 percent based on the current stock price — about the same as other big manufacturers such as Caterpillar Inc. and Deere &Co. Dividend-paying stocks are in favor because they deliver reliable quarterly payments at a time when interest-bearing savings accounts pay almost nothing.

Boeing’s price-to-earnings ratio, which measures the value of its shares compared to its profits, is currently 16.8, up from 13.8 a year ago. The five-year average is 18.3, suggesting that investors still aren’t putting as much value on Boeing’s profits as they did in recent years. However, its P/E ratio is higher than Caterpillar’s 9.9 and Deere’s 10.8. Defense contractor Lockheed Martin Corp. is valued at 11.3 times earnings.

Back in July 2007, Boeing shares were at an all-time high of $107.83, according to FactSet. The stock was subsequently hurt by 787 delays and trouble locking up a huge contract to build a new tanker for the Air Force. Then it plunged along with other big companies during the market sell-off, hitting a low of $29.05 on March 3, 2009.

Richard S. Nackenson, the senior portfolio manager for the Neuberger Berman Multi-Cap Opportunities Fund, said he added to his Boeing holdings after the battery problems occurred. Boeing was already the top holding in Nackenson’s fund. He says the 787 risk was reflected in Boeing’s stock price in January.

“I want to be very clear: the battery issue has to be resolved, and we want to see the planes flying,” Nackenson said. “Evidence is starting to suggest that will take place sooner than the market had originally thought.”

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