The share price of The Boeing Company (BA - Free Report) plummeted as the company’s next-generation 787 Dreamliner was once again in the news for the wrong reason. 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, Fla., had to return to Manchester after unspecified malfunctions.
Fortunately, both the incidents did not cause any injuries. The only casualty it seems was Boeing’s stock price which suffered the biggest drop in two years.
The much-hyped 787 Dreamliner was marred by glitches from the very beginning. First, its delayed launch and then the two battery overheating incidents in Jan 2013 that grounded the entire fleet of 50 Boeing 787 airplanes. However, in Apr 2013, The Boeing Company received the green light from the U.S. Federal Aviation Administration for the 787 Dreamliner’s redesigned battery.
One can relate the current fire to Boeing 787’s previous battery issues. However, the location of the fire proves that this incident is no way interlinked to the previous series of glitches and small technical problems.
The fire issue is being investigated by the U.K. aviation officials and Boeing engineers. If the 787 fleet needs to be grounded yet again, subject to investigations and regulatory decisions, it will be a huge blow to investor confidence. And if it finally boils down to a much graver manufacturing fault, the stock price of this premier airplane manufacturer and defense prime will likely be crushed.
Currently, the company builds Dreamliners at the rate of 7 per month and expects to increase the rate to 10 per month by 2013 end. However, with the increasing demand for Boeing Dreamliner, this rate of production does not seem to be enough. With approximately 900 orders in hand, the company would take more than a decade to deliver all these planes. We note that sales are only recorded once the delivery is made and not earlier. So, a growing order book does not necessarily translate into near-term revenues. Indeed, the company recently indicated that its South Carolina plant that builds Dreamliners would half the production rate per month, thereby not being able to meet its 2013 target.
Despite the untoward incident, Ethiopian Airlines continues to trust its contractor. It plans to continue to operate the other three 787s in its stable. Moreover, other airline customers including United Continental Holdings, Inc. (UAL - Free Report) and All Nippon Airways have confirmed that their own 787 fleet would remain in operation and do not believe that these malfunctions are big enough to ground the fleet. The company presently retains a short-term Zacks Rank #2 (Buy).
Other stocks to look out for in the space are Embraer SA (ERJ - Free Report) , and Northrop Grumman Corp. (NOC - Free Report) , both with a Zacks Rank #2 (Buy).