Boeing Co. (BA:US) investors are betting that the 787 Dreamliner’s grounding is nearing an end, which would allow the planemaker to resume deliveries and reap cash from its marquee jet.
The shares have rallied 15 percent from a 2013 low (BA:US) on Jan. 29, after regulators ordered 787s parked following a battery fire on one plane and an emergency landing by another. Boeing beat the 3 percent gain for the Standard & Poor’s 500 Index and reached the highest (BA:US) since May 2008 last week.
While the U.S. Federal Aviation Administration hasn’t said when the 787 can return to service, Boeing said testing on the battery fix is more than half complete and it will submit the proposal after ground tests and a certification flight “within the next several days.” Having the jets sidelined stalled Boeing’s drive to add revenue by doubling output this year to 10 planes a month from a backlog of more than 800 Dreamliners.
“Boeing has a very long record of being able to work through engineering challenges,” said Peter Jankovskis, chief investment officer of Lisle, Illinois-based Oakbrook Investments LLC, which manages $3.4 billion including Boeing stock. “Once they get through this and begin ramping up 787 production again, that’s when the cash flow turns in their favor.”
Deliveries are important because buyers typically make large payments as they take possession of their planes. The Dreamliner’s starting list price is $206.8 million, from which customers typically get a discount.
Those handovers were halted after the FAA issued its Jan. 16 grounding directive, joined by regulators worldwide to cover all 49 of the 787s in service. Just a month earlier, Boeing announced a 10 percent dividend increase, the most since 2007, and said it was resuming a $3.6 billion stock-buyback plan.
Boeing extended its advance today, rising 0.3 percent to $84.36 in New York. The stock closed at $86.62 on March 26, the highest since May 19, 2008, and its 12 percent gain in March marked the best monthly performance (BA:US) in three years.
“It’s a giant cash-flow story waiting to happen,” said Michael Derchin, a CRT Capital Group LLC analyst in Stamford, Connecticut. “They were on their way prior to this incident.”
Dreamliners may fly again in June, he said. Swift FAA approval may mean that the battery episode is eventually seen as just a short delay in the payoff from a plane whose production setbacks left it more than three years behind schedule, according to Derchin, who has a buy rating on the stock.
Marc Birtel, a Boeing spokesman, declined to give a timetable for the company’s next steps beyond “the next several days” description for the ground test and a certification flight with FAA inspectors. The FAA also isn’t discussing its schedule, said Laura Brown, an agency spokeswoman.
Boeing’s rally began in earnest last month when it became clearer that the faults were limited to the Dreamliner’s lithium-ion battery and wouldn’t require a costly redesign of the entire electrical system, Derchin said.
The reworked battery from supplier GS Yuasa Corp. (6674) includes a steel enclosure designed to prevent a fire, more spacing between the lithium-ion cells to reduce the chances of overheating and new circuitry in the battery charger, according to Boeing.
Boeing chose the more powerful lithium-ion batteries found in mobile phones over traditional nickel-cadmium cells because the Dreamliner conserves fuel by using five times more electricity than similar jets. Boeing says the 787 provides a 20 percent gain in fuel economy over comparable wide-bodies.
It’s still not certain the FAA will accept Boeing’s “containment approach” after failing to discover the root cause of the battery’s overheating, said Christian Mayes, an analyst with Edward Jones & Co. in Des Peres, Missouri, who has a hold rating on the stock.
Even if the FAA does approve the fix, the agency may restrict the distance the Dreamliner flies with the new battery system as an added safety precaution, which would be a “de facto continued grounding,” Mayes said.
“We’re definitely waiting and seeing,” Mayes said. “The stock seems to price in flight resumption for the 787, but there are risks that remain.”
The FAA grounded the 787 after a battery caught fire on a Japan Airlines Co. (9201) jet parked at Boston’s airport on Jan. 7 and the unit on an All Nippon Airways Co. (9202) flight began smoldering and spewing smoke in Japan the following week, prompting an emergency landing.
Gary Bradshaw, a fund manager with Hodges Capital Management in Dallas who added to his Boeing position after the JAL fire, expects the stock to continue its climb. The shares are still 17 percent lower than Oct. 9, 2007, the day before the first of seven postponements in the 787 program became known.
“Once they get these 787s rolling off on a regular basis and get up to 10 a month, they’ll have lots of cash coming in,” Bradshaw said. “This will end up as a bump in the road.”
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