Clearer Skies May Be Ahead for Boeing

Even companies that on the surface seem far removed from Wall Street can't escape the chaos in financial markets. Consider aircraft maker Boeing (symbol BA). It counts among its largest customers International Lease Finance Corp., a subsidiary of American International Group, the beneficiary of an $85-billion government rescue. Regardless of whether AIG sells the leasing unit, some investors worry that the uncertainty could impact Boeing's sales.

Boeing didn't need any more bad news -- its stock has fallen 46% since last October. The company's biggest problems are high fuel prices and the financial health of its primary customers, U.S. commercial airlines. Investors worry that mergers and bankruptcies in the airline sector will lead to fewer sales of big commercial jets.

Add to that the September 5 walkout of the company's largest union, the International Association of Machinists and Aerospace Workers. The strike is costing the Chicago-based company $100 million a day in lost revenue, a figure that could total about $3 billion before the work stoppage is over. The previous strike, in 2005, lasted nearly a month and cost Boeing $2.2 billion in lost revenues.

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Then there's the 15-month delay of introducing Boeing's much touted fuel-efficient jet, the 787 Dreamliner. The program has been delayed four times. Should the strike continue for more than a few weeks, delivery of the Dreamliner could be pushed to 2010.

Boeing is flying through stormy skies now, but the stock still looks good to its fans over the long haul. The company's $271-billion order backlog also speaks to the robustness of aircraft sales.

But some investors are concerned that some of those sales could fizzle because of the credit-market crisis. "Investors have taken shots at anything that relies on credit markets, which aircraft makers do since their purchases need to be financed," says Chris Armbruster, analyst with Al Frank Asset Management. "As that fear dissipates over time -- and I believe it will -- there's a clear case" for investors awarding Boeing shares a higher price-earnings ratio. Adds Fletcher Perkins, an analyst with Hillman Capital Management: "You can't have all the airlines going bankrupt."

Armbruster points out, moreover, that although domestic airlines are in turmoil, global demand for jets from foreign fleets remains strong. Boeing's sales are well diversified geographically, and there's been a pickup in demand from China and the Middle East. In fact, just 11% of Boeing's backlog comes from domestic customers.

Delays notwithstanding, the Dreamliner's potential is huge. "Long-term," says Perkins, "it will turn into a very good profit source for Boeing." The machinists' strike might actually give Boeing's suppliers some breathing room to catch up on parts delivery for the 787. Airbus, Boeing's largest rival, also has a fuel-efficient jet in the works, but its model won't be available until 2013. Adds Perkins: "The 787 has significant advantages in fuel economy over Airbus."

Meanwhile, Boeing's military-aircraft division remains strong. "Although defense-spending growth rates are expected to moderate, overall spending remains high, with emphasis on providing nimble capabilities to combat terrorism and niche threats," Argus analyst Suzanne Betts wrote in a recent report.

Boeing shares look cheap. At the September 25 close of $57.42, the stock trades at eight times estimated 2009 profits of $6.85 per share (analysts expect $5.62 for '08). That's well below the average five-year P/E of 23.