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Boeing: Sell The Flap, Buy The Weakness

 January 10, 2013 01:54 PM

(By Mani) Shares of Boeing Co. (NYSE: BA) were weak this week over safety issues with 787 Dreamliner, and it could take several weeks to get a full accounting of what exactly happened to the two 787s in Boston this week.

The 787, which is mainly built out of composite materials, is touted as the Boeing's future cash cow as each plane costs about $200 million. However, the 787, is not giving a "Dream Run" for Boeing with several incidents causing negative publicity. This week, one 787 plane caught fire, and another suffered a fuel leak.

In the fire that occurred Monday in the avionics bay of the parked 787, the source based on media reports appears to have been a battery. Subsequent to the fire, United Airlines inspected the avionics bays on its 787s and discovered that one had improper battery wiring, a potential cause of electrical fires.

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Being able to trace the cause of Monday's fire to this sort of manufacturing error-- as opposed to a design flaw--would be good news as it would imply a relatively straightforward inspection and remediation regime. Prior 787 incidents have been of a similar ilk, despite sometimes garnering dramatic headlines.

Similarly, it appears the fuel leak that occurred Tuesday stemmed from a readily diagnose-able and fixable issue. Indeed, the airplane, after an inspection was cleared to fly from Boston to Tokyo. United Airlines has also resumed its LA-Tokyo flights. If airlines are worried, they sure aren't showing it.

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"But based on currently available information, we're growing convinced the issues are ordinary "teething" problems, or even pedestrian operational hitches, that are merely being magnified by the 787's media glow," Oppenheimer analyst Yair Reiner wrote in a note to clients.

It seems unlikely that these incidents will have a material impact on the 787's ability to operate or on Boeing's ability to continue building and selling the aircraft. The aircraft's dispatch reliability of about 98 percent is good for an aircraft of its age, and other wide-body introductions have had their issues, too.

For instance, rival Airbus' A380 quietly waded through various problems, including nuisance warnings, main gear steering systems, and a host of minor engine-related tweaks.

The 787's tortured past and its newness have made investors understandably sensitive to incidents of this kind. However, this sensitivity will gradually subside as the 787's tenure lengthens, and these incidents unlikely fundamentally alter the 787's risk profile.

Boeing is one of two large commercial aircraft manufacturers globally, and one of the largest defense contractors in the world. iStock believes that the 787 program has begun to find its footing, and successful execution could drive Boeing's fundamentals and stock.

The company reported higher than expected 787 deliveries for the fourth quarter at 23, including 11 in December, totaling 46 in 2012. The strong deliveries would help the company reducing cash burn.

"The 787's ramp should account for more than 40% of BA's top-line growth in 2012 and more than 80% of its growth in 2013," Reiner noted.

Moreover, with demand for the 787 driven primarily by secular rather than cyclical factors, the aircraft should help shield Boeing from the budgetary and economic headwinds threatening other parts of the business.

In addition, as 787 production begins to hit its stride, investors can look forward to seeing $20 billion of working capital gradually get released from inventory.

"We expect the brouhaha to subside like the prior concerns over the GEnx fan midshaft and the HS gearbox. We'd be buyers on this weakness," Reiner added.



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