Boeing stock on rough ride; analyst downgrades rating to 'neutral'

Boeing shares took a beating yesterday, tumbling $3.66 to a 52-week low of $45.18. The drop is the latest blow in a bruising summer for the aerospace giant, as Boeing stock has fallen more than 30 percent since June 1.

Most of yesterday's damage was inflicted by a one-two punch from Wall Street and American Airlines.

First, influential aerospace analyst Heidi Wood of investment bank Morgan Stanley Dean Witter lowered her rating on Boeing to "neutral" from "outperform" and slashed her earnings expectations for 2002 and 2003. Wood cited concern over weak orders for commercial aircraft as airlines suffer through their toughest year in a decade.

Later, AMR Corp., the parent company of American, warned the country's largest airline will post significant losses in the third and fourth quarters. Consequently, American will not exercise rights to purchase $1.2 billion worth of Boeing planes that would have been delivered in 2002 and 2003.

As recently as mid-July, American's chief financial officer, Tom Horton, said the airline would cut capital spending $1 billion by not exercising aircraft purchase rights, primarily for 737-800s. Friday's projections call for a further $200 million reduction.

Boeing's difficulties were exacerbated by the weakness of the stock market as a whole, as the Dow Jones industrial average fell 234.99 points to 9,605.85.

"Today is not a good day for anybody," said Kevin Tynan, who follows Boeing for investment firm Argus Research.

In a research note accompanying her downgrade, Wood said she expects "500 aircraft deliveries (from Boeing) in 2002 and 440 in 2003, which suggests a downcycle." As a result, she said: "We've cut 10 cents off 2002 (earnings per share estimate) to $4.55 and 65 cents off 2003 to $4.40."

Further, Wood said her research indicates "an order upturn is several quarters away."

Boeing Chairman Phil Condit earlier this week reiterated a July statement that Boeing will deliver 510 to 520 planes in 2002. That is down from Boeing's original forecast of 530 deliveries in 2002.

Condit has also said Boeing will receive 400 aircraft orders this year, but as of Sept. 4 the total stood at only 202 orders.

Wall Street is keenly interested in the outlook for 2003. The production schedule for 2002 is largely known because the lead-time from order to delivery is generally nine to 14 months. Boeing has not yet issued a projection for 2003 but will do so when it announces third quarter earnings Oct. 18.

Robert Toomey, a Seattle-based analyst with investment firm Dain Rauscher, still rates Boeing a "strong buy" due to the strength of the company's military, space and communications businesses. Even if aircraft production falls as low as 400 planes in 2003, Toomey said Boeing would still earn more than $4.00 per share, making the shares cheap at current levels.

But many investors still trade Boeing shares based primarily on the health of the commercial-airplane business. "That's definitely still a very important part of the psychology around the stock," Toomey said.

Like Wood, Toomey has lowered his production outlook for 2003. "There is a reasonable chance that (deliveries in 2003) hold up in the 400 to 450 range," he said, because airlines will need to replace aging aircraft.

In a July research report, Toomey forecast Boeing would make 500 planes in 2003.

Dire announcements from airlines such as American are responsible for the lowered expectations.

American lost $105 million in the second quarter, but yesterday the airline said it "expects a third quarter loss considerably larger" than that and "a significant fourth quarter loss."

American's statement is particularly troubling because July 1 to September 30 is traditionally the most profitable time of year for airlines.

"It's the strongest quarter, absolutely," said Sal Colak, an airline analyst with investment bank CIBC World Markets. "For (American) to lose money in the third quarter, it means the business traveler has totally disappeared."

Major U.S. airlines piled up more than $350 million in losses in the second quarter. Most blamed slumping business travel and rising fuel prices and labor costs.

Those trends appear to be worsening and may not improve soon.

The U.S. airline industry could lose as much as $2.6 billion in 2001, according to a report issued Thursday by James Higgins and Christopher Kennedy of Credit Suissse First Boston. The two expect a whopping $1 billion loss in the fourth quarter alone.

All that red ink will make it harder and harder for airlines to purchase new airplanes, resulting in continuing pressure on Boeing stock.

David Bowermaster can be reached at 206-464-2724 or