Shares of Boeing Co stand to gain if the company can fly its long-delayed 787 Dreamliner this month. But history shows that a last-minute glitch cannot be ruled out until the plane is in the air.
Shares of the world’s second-largest airplane maker are near $53.50, up 25% for the year despite economic turmoil that resulted in airline capacity cuts and some order cancellations. A new economic crisis percolating in Dubai could have negative repercussions for Boeing as well.
Against this backdrop, the company is struggling to shore up its credibility that hinges in large part on its ability to produce the vaunted Dreamliner, which boasts a lightweight, composite design and fuel efficiency.
The test flight for the 787 already two years behind schedule has been pushed back several times, most recently in late June, when Boeing discovered a structural problem that required reinforcing an area within the side-of-body joint of the aircraft.
Boeing says it will fly the plane this month. And some industry watchers predict a first flight as early as December 14.
Long-term growth potential
"Achieving its development targets for the 787 and winning several high profile defense contracts should reward investors with long-term growth," said Jefferies & Co aerospace analyst Howard Rubel in a research note. Jefferies does not own Boeing shares.
"We now expect activity on the first several aircraft to pick-up in preparation for first flight. We believe that the company is using an abundance of caution to be sure that it has margins in its tests and design," said Rubel, who has a BUY rating on Boeing shares and price target of $58.
Chance for disappointment
"While the initial reports appear encouraging, investors need not be reminded that the first flight of the 787 has been postponed several times, and each time shares have reacted negatively," according to a Susquehanna Financial Group note yesterday.
Susquehanna, which does not own Boeing shares, also noted recent commentary regarding the debt crisis in Dubai and its potential impact on Boeing’s robust order backlog.
"Given the various issues surrounding BA heading into the New Year, current shareholders may want to enact protective strategies in order to guard against possible negative developments over the next several weeks," the note said.
Susquehanna recommends a so-called risk reversal strategy for cautious shareholders concerned that another delay could pressure shares.
In a risk reversal, the cost of buying a protective put option is largely offset by the sale of a call option. The strategy offers an alternative way to buying protection at a limited cost.
For example, based on Tuesday’s close of $53.72 in Boeing, the January $50 put/$57.50 call risk reversal could be purchased for a 19-cent premium.
The strategy would provide protection below $50 a share while foregoing upside above $57.50.