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Wachovia: Boeing Faces Risk of 787 Delays

The firm downgraded shares of the aerospace giant Monday

Boeing (BA) has been raking in record orders for commercial aircraft in recent months, as the aerospace giant knocks over its European rival Airbus. But Wachovia Capital Markets thinks Boeing has already seen the most orders it will get and says the company faces the risk of delaying on deliveries of its new 787 Dreamliner airplane. After Wachovia analyst Joe San Pietro downgraded Boeing to market perform from outperform, investors sold the stock on Monday Jan. 22.

Boeing had surpassed even its own expectations and reported a record 1,044 commercial airplane orders for 2006, eclipsing its former mark, set in 2005, by 42 planes. Boeing is wresting leadership of the industry from Airbus, which has suffered setbacks including production delays for its flagship A380 superjumbo jet in recent months (see, 1/5/07, "Boeing Takes Back the Skies").

With such announcements lifting its wings, Boeing's share price has zoomed up around 16% in value since fall 2006 and 33% for the past year. In contrast, the Standard & Poor's 500 index has only gained 14%. "We would expect to see some profit-taking at these levels," San Pietro said in a note dated Friday Jan. 19. Investors sold Boeing more than 3.5% to $85.49 per share in early afternoon trading on the New York Stock Exchange Jan. 22.

San Pietro thinks it's likely that Boeing will have to delay its delivery of the 787 to customers by three to six months from when it's first expected in May 2008. For the first time, Boeing has outsourced major portions of the aircraft's development to foreign partners, such as the Japanese wing maker Mitsubishi Heavy Industries and the airplane body maker Global Aeronautica, a joint venture between the Italian company Alenia and Texas-based Vought Aircraft Industries.

Both suppliers have fallen behind schedule, San Pietro says. They're unhappy with the costs of maintaining a schedule, which was caused by Boeing-directed changes, and are demanding more money. "MHI has caught up a bit but is still behind schedule. Alenia by contrast appears to be the major culprit at this time, and we understand that Boeing has sent an army of engineers to help get the program back on track," Pietro wrote.

While the analyst warned about the potential impact that a delivery delay announcement could have on Boeing's stock price, Pietro remains positive about Boeing long-term. "The B787 should be a home run for Boeing once it passes through this teething stage."

(Mitsubishi Heavy Industries, Vought, Boeing, and Alenia Aeronautica's parent the Italian technology group Finmeccanica could not immediately respond to a request for an interview. Wachovia does business with Boeing, but San Pietro certifies that his report accurately reflects his views and they are unrelated to his compensation.)

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