Defense/Aerospace Industries

[DewDiligence]

Dreamliner?

[This skeptical piece on Boeing is from the “Lex” column of the Financial Times. I took the liberty of adding the question mark to the header.]

http://www.ft.com/cms/s/3/5d305614-9312-11de-b146-00144feabdc0.html

›August 27 2009 23:11

Aircraft windows are rounded because the square picture windows used in early passenger planes concentrated stress on the corners. Aviation history is the process of such trial and error. The problem for investors in Boeing – which on Thursday announced that its five-times delayed 787 Dreamliner will fly by year end – is that its share price has become a bet on a series of engineering and manufacturing experiments.

Investors reacted with relief to news that the long-troubled programme required only a $2.5bn charge, sending Boeing shares up by a 10th in response. It had been feared that delays would render the company’s most successful sales effort ever entirely unprofitable – because customers start to receive compensation when their planes do not arrive on time. But management insists the Dreamliner will still turn a buck and that they can hit their self-imposed deadline to satisfy the Federal Aviation Administration that the 787 is safe.

Boeing, however, does not deserve the benefit of the doubt just yet. The computer modelling that designed the plane and failed to anticipate the last set of structural problems must be suspect until physical testing is complete. A disparate supply chain is untested at steady production rates, never mind the expansion required to ramp up to the desired 10 aircraft per month in 2013.

Nor, for those willing to bet that the company gets sixth time lucky, are the shares particularly cheap. They trade on 12 times earnings that are forecast to fall for the next three years into the aerospace downturn. Looked at another way, Boeing is on 25 times the trough earnings of the last recession. Military spending – which accounts for half of sales – is under threat. And longer term its reputation has been battered. Holding on to the shares will be a trial, and possibly an error.‹