Time to Fly Out of Boeing

01/19/2012 3:59 pm EST


Jim Jubak

Founder and Editor,

Sometimes you just have to say that a trade hasn’t worked out the way that you thought it would…and that giving it more time just isn’t going to help, writes MoneyShow’s Jim Jubak, who can also be found at Jubak’s Picks.

On September 30, 2010, I added Boeing (BA) to my Jubak’s Picks portfolio with a target price of $84 a share by September 2011. The idea was that Boeing would solve its big problems with the 787 Dreamliner and the stock price would rise as planes started to roll off the assembly line.

It didn’t quite work out that way. Boeing’s shares were essentially flat with my $66.09 purchase price by the September 2011 deadline, as delays exceeded even my earlier estimates, and as late delivery penalties ate into the profit margins for future production.

I gave the stock an extra year, extending my target price to November 2012 and cutting my target price to $82. My gains on this trade now come to about 13.5% since September 2010.

But now I think it’s time to cut the cord and sell Boeing. The company’s problems aren’t limited to overpromising and underdelivering on the 787. That style seems to go deep into management culture.

In 2011, Boeing delivered 477 planes, a few short of its guidance for 480. The company didn’t meet its target to deliver 15 to 20 787s and 747-8s (actual delivery 12).

At its December investors conference, the company said it would reach 787 production of 3.5 a month in late winter/early spring of 20112 and 5 per month by the end of 2012. That’s below the previously forecast of 7 a month by the end of 2012.

The longer it takes to ramp production, the longer it will take for Boeing to actually make money on the 787.

I would be more inclined to give Boeing more time if other trends weren’t running against the company. In October, for example, Boeing said that investors should expect an increase in pension expense to $2.6 billion in 2012 from $1.7 billion in 2011.

 Proposed cuts in the U.S defense budget will hit Boeing, the third largest US defense contractor, hard. Standard & Poor’s projects just a 1% increase in Boeing’s revenue from this unit (50% of total company revenue) in 2012.

Operating margins for the company have climbed in recent quarters, to 9.7% in the third quarter from 8.2% in the third quarter of 2010, but that’s not enough, in my opinion, to make up for the crunch in the defense business.

Boeing reports fourth-quarter earnings on January 25. I think earnings for that period are likely to meet Wall Street forecasts for $1.01. But I am worried about guidance for 2012.

I’d rather take the 13.5% gain I’ve got in this stock as of January 18, avoid that risk, and look for a company with a better record of meeting its promises.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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