For blue-chip stocks, it's been another solid year. Fully 25 out
of the 30 stocks in the Dow Jones Industrial Average are up this
year, led by a 61% spike in
Bank of America (NYSE:
, a 44% gain for
Home Depot (NYSE:
and a 39% jump for
Walt Disney (NYSE:
Among the five 2012laggards in the Dow, one stock has
underperformed for quite some time. Even as the Dow has finally
clawed back to levels seen five years ago,shares of
remain nearly 40% below levels seen before the financial crisis
It's quite easy to see why the world's largest airplane maker
has lagged. Financial performance has been weak as the company
spent heavily on the development of new planes, incurring massive
cost overruns and missed deadlines. As a result, a company that
routinely generated at least $4 billion in annualfree cash flow has
struggled to meet that target in recent years.
Big hopes for the Dreamliner
More than five years ago, Boeing began developing a next-generation
lightweight aircraft known as the Dreamliner, or 787. Although
Boeing periodically updates its existing planes, such as the 747,
with fuel-saving or range-extending modifications, the 787 began
with a clean sheet of paper. The company sought to revisit every
aspect of the design and production processes, and we now know with
the benefit of hindsight that Boeing "bit off more than it could
chew." The delivery dates for the first 787s were continually
pushed back, yielding a great deal of bad will with the key airline
customers that had been hotly anticipating the snazzy new
Even as deliveries of the 787 began, Boeing couldn't seem to get
it right. In fact, it took until last month, when plane No. 66 was
produced, for Boeing to declare a perfectly-built plane that didn't
require rework. As a result, Boeing is now slowly ramping up
production and, as output of the 787 rises further, frustrated
customers will finally start to take deliveries.
Here's the good news: Demand for new aircraft remains
surprisingly resilient in the face of a still-slow globaleconomy .
Carriers are eager to retire cramped inefficient planes with the
Dreamliner, as these planes have lower operating costs and provide
a more desirable flying experience -- a key consideration for
carriers that like to push pricing to premium levels.
Finally working out the various production bugs has ledWall
Street analysts to revise their view of Boeing's coming output
plans for this all-important plane. Merrill Lynch, for example, had
been anticipating the production of 330 planes through the end of
2016. After taking a fresh look in mid-September, the company now
pegs that figure at 495 -- a 50% jump.
And this all pivots back to Boeing's potential free cash flow
generation -- a keycatalyst for this stock. Analysts say free cash
flow could move back up above $3 billion this year, the best
showing since 2009. Goldman Sachs sees that figure reaching $4.7
billion in 2013, and once Dreamliner production moves yet higher in
2014, Goldman projects free cash flow to hit $6.2 billion, not far
from the company record hit back in 2007.
Notably, stronger free cash flow won't simply be the result of a
sharp pullback in capital spending (as many companies do to goose
free cash flow). Instead, Boeing has extensive investment plans for
its other plane programs, which should keep its entire fleet up to
date as rival Airbus also sharpens its game. It's a win-win for
airline carriers, and they'll have ample incentive to keep retiring
older planes for newer, more fuel-efficient ones.
Boeing's rising free cash flow may also finally trigger a series
of more robustdividend hikes. From 2003 through 2008, Boeing
boosted its dividend typically 15% to 20% every year. Yet after
reaching $1.62 a share in 2008, it has barely risen (to just $1.76
a share) since then. If Boeing can meet those free cash flow
targets, then the dividend may start rising again at a 20% clip,
exceeding $2.50 a share by mid-decade. That would be good for a
Merrill Lynch took heed of management's comments on that front:
In a recent meeting with management, executives "did notoffer any
details but implied that they would do 'something more shareholder
friendly' in 2013. This could potentially be an increased share
buyback or an increased divided."
Risks to Consider:
Orders for new aircraft continues to remain surprisingly
strong, though an even deeper economic slowdown would put this
momentum at risk.
Action to Take -->
The bungled Dreamliner launch led investors to see Boeing as a
high-risk stock, as the company overspent and lacked the right
controls. "Management no longer has interest in doing 'moon shot'
aircraft development. Rather, they want to be more like
, doing 30% to 50% upgrades to existing planes," note Merrill's
analysts. The slightly more conservative approach should lessen the
perceived risk in the stock, enabling themultiple to expand a few
points. And that should be just enough to shift Boeing from being a
Dowlaggard to a Dow leader.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.