For anyone who lusts after bad news in the hope of buying a beaten-up stock and seizing upon a once-in-a-lifetime opportunity, Boeing Co. offers an interesting case: The news appears bad, awful, grim – whatever word you want to use – but the stock price is nowhere close to reflecting this impression.
On Friday afternoon, the shares traded at about $74.70 (U.S.), down just 4.5 per cent from their recent high earlier in the month, and up nearly 12 per cent from their recent low in June.
This is a remarkably smooth ride given the volatile backdrop. Boeing’s new 787 Dreamliner is being savaged following what press reports are calling “mishaps” – or fuel leaks, a battery fire and, most ominously, an emergency warning that forced an All Nippon Airways Co. flight back to the tarmac.
Two Japanese airlines grounded all 787 flights this week. The U.S. Federal Aviation Administration followed suit, as did other countries, essentially halting all flights worldwide until airlines can show that the planes are safe. According to Bloomberg News, that marks the first such grounding of an entire plane model by the FAA in 34 years.
This is serious business and a big blow to Boeing’s reputation – adding to delays and cost overruns that had plagued the 787 before it finally began to fly commercially a little more than a year ago.
A lot is at stake here. The 787 is Boeing’s first new commercial jet since 1995 and is the result of a decade of development. Meanwhile, Boeing’s rival, Airbus, has its own new jet, the A380, which entered service in 2007.
So why is the stock market giving the 787 mishaps a collective shrug? Largely, it’s because the market believes these are short-term setbacks that require nothing more than a little fine-tuning to the plane’s batteries – rather than a wholesale reassessment of the plane as a fuel-efficient marvel.
Boeing remains on track to make 10 plane deliveries a month in 2013, up from a total of 46 deliveries for all of 2012 – and nothing so far has altered that forecast.
While Australia’s Qantas Airways Ltd. cancelled an order for a 787 this week, it had nothing to do with the recent problems with the airplane, but rather uncertainty about the airline’s Jetstar unit.
For what it’s worth, analysts are also sticking by Boeing. True enough, Goldman Sachs cut its target price on the stock to $90 from $98 – but the new target price still implies a gain of 20 per cent over the next 12 months. Other analysts stuck to their recommendations and targets.
This gives investors a lot to contemplate. The contrarian instinct to pounce on a stock when it is beset by bad news implies that Boeing is a terrific buy right now. However, the lofty share price does not.
The best bet is keep that contrarian impulse in check and wait for a better buying opportunity. For all the big headlines about grounded fleets, the news has to be much worse for the stock market to take notice.