For those curious how it is that Goldman just reported a stunning beat across the board, here is a hint: the firm had flaming paperweight extraordinaire maker Boeing (a firm which has now had at least one component in 4 Dreamliners spontaneously combust, and has lead to the grounding of the entire ANA and JAL fleets) on its Conviction Buy list. At least until today, when the stock is indicated to open some 5% lower. Which means as of moments ago, Goldman is done selling BA stock to its clients. With conviction.
We remove Boeing from the Conviction List, while retaining our Buy rating. We lower our 12-month price target to $90 from $98. Last night an All Nippon Airways (ANA) flight on a 787 aircraft made an emergency landing. Multiple reports state this was due to an alert in the cockpit of an issue related to batteries in the aircraft. This follows the January 7 incident in which a Japan Airlines 787 experienced a fire while parked at the gate at Logan airport, which was also reportedly caused by the overheating of a lithium ion battery. BA is up 31% since we added to the CL on 8/8/11 vs. SPX up 32%. It is up 3% the past 12 months (SPX up 14%).
We remain bullish on the fundamentals of the Commercial Aerospace sector, we continue to favor the long-term earnings and cash flow growth driven by the 787 product cycle, we continue to expect significant shareholder-friendly capital deployment from BA, and we still believe valuation for the stock is attractive.
We also believe it is normal for new aircraft programs to experience challenges in the early part of entry in to service, including many historical new aircraft programs requiring multiple FAA-driven changes. And it remains possible that the recent 787 issues fall in to the “teething” category, as much information is still unknown.
But despite our view on all of these items, we also recognize that there have now been two incidents in a very short window pointing to potential issues related to one part – lithium ion batteries – and the concentration and possible overlap of cause within these events heightens the risk of a potentially more meaningful required change to the aircraft and therefore a possible delay in the pace of the production ramp. This would make near-term outperformance of shares more difficult to see.
Our estimates are unchanged (our model already assumes 10 787s per month is achieved in mid-2014). We lower our price target to $90 from $98 on a lower P/E (13.8X vs. 15.0X prior) given these increased risks. Other risks include the new aircraft order cycle and DoD spending priorities.