Wolfe Research sees airlines running their businesses longer-term with more debt and cash on the balance sheet as good for Boeing
Shares of Boeing (BA) are trading lower on Tuesday after the planemaker announced that its 787 production rate will temporarily be lower than five per month and that it will likely deliver "fewer than half" of the 787s currently in inventory this year. On Monday, the Federal Aviation Administration had said that some undelivered Boeing 787 Dreamliners had a new manufacturing quality issue that needed to be fixed before the planes could be delivered. Meanwhile, Wolfe Research analyst Hunter Keay upgraded Boeing to Peer Perform following United Airlines' (UAL) recent big aircraft order.
787 PRODUCTION CUT, TO DELIVER LESS THAN HALF: Boeing has announced program deliveries across its commercial and defense operations for the second quarter of 2021. "In the second quarter, we made progress in safely returning the 737 MAX to service in more international markets and increasing the pace of 737 deliveries," the company said.
As Boeing has previously shared, the company has been engaged in detailed discussions with the FAA on verification methodology for 787 fuselages, and conducting associated inspections and rework. In connection with these efforts, the company has identified additional rework that will be required on undelivered 787s. Based on our assessment of the time required to complete this work, Boeing is reprioritizing production resources for a few weeks to support the inspection and rework. As that work is performed, the 787 production rate will temporarily be lower than five per month and will gradually return to that rate. Boeing now expects to deliver fewer than half of the 787s currently in inventory this year.
"We will continue to take the necessary time to ensure Boeing airplanes meet the highest quality prior to delivery. Across the enterprise, our teams remain focused on safety and integrity as we drive stability, first-time quality and productivity in our operations," the company added.
LESS BEARISH: Wolfe Research analyst Hunter Keay upgraded Boeing to Peer Perform from Underperform with a fair value price estimate of $224 as he now models higher capital expenditures for U.S. airlines in 2022-2024 than he did three months ago. It is "illogical to assume" that United Airlines' recent big aircraft order "won't spur others," not only among direct competitors but also from non-competitors who see planemakers gaining pricing leverage each day, Keay contended. Bottom line, if airlines feel they can run their businesses longer-term with more debt and more cash on the balance sheet, that is good for Boeing, the analyst added. While acknowledging Boeing "has some issues," Keay now thinks an improving book-to-bill throughout 2021 will help mitigate the downside scenario he thought he saw a few months back.
PRICE ACTION: In Tuesday morning trading, shares of Boeing have dropped about 3% to $230.84.