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We have downgraded our long-term recommendation to Neutral from Outperform on the aerospace and defense behemoth The Boeing Co. (BA - Analyst Report) on Sep 23, 2013.

Why the Downgrade?

Boeing is the largest aircraft manufacturer in the world in terms of revenue, orders and deliveries, and one of the largest aerospace and defense contractors besides other defense giants like Lockheed Martin Corp. (LMT - Analyst Report), Raytheon Co. (RTN - Analyst Report) and Northrop Grumman Corp. (NOC - Analyst Report). In fact, Boeing’s defense business accounts for approximately half of its top line.

However, headwinds in the global airline industry and cutbacks in the U.S. defense budget have certainly shaken the confidence of many investors now. Budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks. The tepid recovery of the U.S. economy raises concerns, which will likely affect Boeing’s prospects.

Boeing recently declared that it will discontinue its production of the C-17 Globemaster III military cargo jet and close the C-17 final assembly facility in Long Beach, Calif. in 2015. The decision comes in the wake of a lack of sufficient orders. The threat of sequestration has created significant planning difficulties for the customers and the entire aerospace industry, thereby leading to a decline in orders.

In its commercial division, the company’s next-generation 787 Dreamliner was once again in the news for the wrong reason. Last week, Norwegian Airline had to ground its 787s after a hydraulic pump failure left a 787 stranded in Bangkok. Again, on Sunday, a 787 Dreamliner operated by the Polish airline LOT had to land unexpectedly in Iceland because of a fault in the airplane identification system.

The Norwegian airline has already asked Boeing to repair the craft following repeated breakdowns while LOT demanded compensation from Boeing for the losses incurred due to the 787′s mechanical issues.

The much-hyped 787 Dreamliner was marred by glitches from the very beginning. Its delayed launch in 2011 was followed by two battery overheating incidents in Jan 2013 that grounded the entire fleet of 50 Boeing 787 airplanes. However, in Apr 2013, Boeing received the green light from the U.S. Federal Aviation Administration for the 787 Dreamliner’s redesigned battery.

In July, the Dreamliner operated by Ethiopian Airlines caught fire while it was parked at London's Heathrow Airport.  Meanwhile another 787 operated by Thomson Airways on way to Orlando, FL, had to return to Manchester after unspecified malfunctions.

Though the company has had glitches with its 787 mascot, its share price has proven to be shock resistant, surging 54.9% year to date. The company presently retains a short-term Zacks Rank #3 (Hold). Stocks worth considering in the space are Lockheed Martin, Northrop and Raytheon; all with a Zacks Rank #2 (Buy).

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