Is it time for Boeing to take off?
Bears vs. Bulls: The stock is off 60% from its high, but its much-hyped plane is finally taking flight.
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| The Bear: Cai von Rumohr, Cowen and Company |
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| The Bull: Joe Campbell, Barclays Capital |
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NEW YORK (Fortune) -- Boeing stock has plunged as air travel swoons globally. This year is expected to be only the third time air traffic has declined in its 50-year history.
Boeing Shares have dropped 60% since their peak in October of 2007, and earnings have sunk 50% in the first quarter as airlines delay or cancel orders, Boeing begins to cut production, and investors worry about Pentagon spending cuts.
But with its 787 Dreamliner ready for launch this summer, should investors consider buying shares of the aerospace manufacturer? For the answer, we asked two top-rated analysts with nearly seven decades of combined experience covering the company.
"The last two down cycles for Boeing were caused by exogenous events - the Gulf War and 9/11 - when people were afraid to fly. This time the cause is the economy. Given the rising level of federal debt, we're unlikely to see a strong snap back to bolster airline traffic and demand for planes.
"If airlines don't need these planes, they will delay buying them. In the first quarter, cancellations outnumbered new orders. The problem for Boeing is that if it continues to pump out capacity, ultimately it'll have to cut production harder.
"It's true that production growth has been more moderate in this cycle, because of delays to the 787 and Airbus's A380. But on the demand side, which is air traffic, it's been worse. The 2008-09 traffic decline already looks steeper than 2001-02.
"This economic downturn is worse than any of the last four, and therefore this cycle should be at least as bad as previous four-year cycles. Earnings are likely to be down in 2010, as well as 2011 and 2012. If 2009 is the first year [of the cycle], that means the rebound comes in 2013.
"On the military side, which makes up half of sales, Boeing is in the cross hairs of Defense Secretary Robert Gates' planned restructuring of Future Combat Systems - a $2.5 billion program for Boeing.
"And its cash flow is a worry through 2010. Boeing will put $500 million into the pension plan this year, which is underfunded by about $8 billion. The last time it was underfunded close to this level, Boeing put an average of $2.7 billion in it for the next three years.
"In the stock's past down cycles, it has underperformed for 10 to 12 quarters. Right now we are six quarters in.
"Also, at this point I would say the 787 Dreamliner is a mixed bag. While sales have been great, its delivery build in 2010-12 is set to be only modestly profitable given the additional costs of its 18-month delay. And the planes on which Boeing makes money - the 737 and 777 - will be heading south.
"Thus, while the 787 ultimately should be a winner, investors are unlikely to wait for the payoff if earnings are declining over a two-year horizon."
"In past downturns Boeing's deliveries declined from 37% to 55% from their peaks. Downturns have two causes: large overproduction and weak demand.
"We clearly have weak demand - in 2009 we are probably going to see only the third decline in airline traffic in the history of jet aviation - but this cycle we are missing the overproduction part of the equation.
"The industry has grown capacity prudently, and with just 0.4% per year growth in deliveries over the past decade, the industry is just now getting back to the 1999 peak production. This should mean that despite the horrible economic outlook, the required cuts will be less dramatic than in past cycles.
"Moreover, in each of the past downturns, with Boeing the dominant player and Airbus a minor player; Boeing bore the entire brunt of the downturn. This cycle with backlog orders equally split between Airbus and Boeing, Boeing will share the pain of the downturn with Airbus.
"Another factor in pushing for a milder downturn is Boeing's delayed and much-maligned 787 Dreamliner which is due to fly in just a few weeks. Boeing hopes to build 10 Dreamliners a month by 2012, booking an extra $10 billion in sales in the 2010-12 period. The increase in 787 sales will further soften the cyclical sales declines in other products.
"Boeing's stock is already down more than 60% from its high, and despite having 85% more earnings than it did right after 9/11, it trades for about the same market value. Most people would agree that today's bigger Boeing ought to be worth more than it was a decade ago.
"So in our view, there are four reasons why the simple Boeing downturn bear argument might be wrong: (1) We have none of the historic overproduction (2) Airbus and Boeing are going to split the pain of the downturn; (3) Boeing is going to add the 787, an all-new hot selling product, and finally (4) Boeing shares have already fallen and it's time for them to go up, not down.
"We have a $50 target price for the stock." 
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