What a wild ride it has been for Boeing (click ticker for report: ) in the past few years. In a move widely applauded for choosing to build the incredibly efficient, mostly-composite, revolutionary 787 Dreamliner (instead of a gargantuan super-jumbo like the double-decker Airbus A380), the engineering, development, and production of the plane has been filled with more than its share of costly problems. Not only was the plane delayed at least a half dozen times during the engineering and development of the aircraft to first flight, but the company is dealing with highly-publicized “teething” pains now that the plane is in service.
This morning, Europe, Japan and India have joined the US Federal Aviation Administration (FAA) in grounding the Dreamliner until problems with its lithium-ion batteries (made by GS Yuasa Corp—6674.JP) have been resolved. Though this is a minor setback, the temporary grounding of a brand-new plane is not uncommon, as European Aviation Safety Agency (EASA) grounded 68 Airbus A380 Airbus aircraft February 2012 due to what we’d consider to be a more serious issue: wing cracks.
Importantly, we think the temporary grounding of the 787 Dreamliner is just that: temporary. In the case of the Airbus fix, it took customers roughly 8 weeks to repair cracks in the wings. And while the electrical systems are highly complex in the 787 Dreamliner, we doubt any battery overhaul will take that much longer. We fully expect Boeing to resolve these issues, and we don’t think such an event will have a meaningful impact on the roughly 850 orders it has received for the Dreamliner since the idea hit the drawing board.
The lithium-ion battery issue will not be the latest negative event in the saga of the 787, but we think the plane will deliver on its requirements to customers and be a long-term success for the US jet maker. And while Boeing may face additional cost pressures on the plane and lower cash flow as production increases may temporarily slow, we’ve long preferred companies in the aerospace supply chain that are highly levered to broad and accelerating aerospace growth. The tally for commercial aircraft orders in 2012 puts Boeing at 921 and Airbus at 833. This compares to deliveries of 601 at Boeing and 558 at Airbus (Boeing book-to-bill: 1.53; Airbus book-to-bill: 1.49).
Such order strength bodes particularly well for the three aerospace firms we hold in the portfolio of our Best Ideas Newsletter: Precision Castparts (click ticker for report: ), EDAC Tech (click ticker for report: ), and Astronics (click ticker for report: ). We also expect aerospace to be a source of strength for industrial bellwethers, General Electric (click ticker for report: ), United Technologies (click ticker for report: ), Honeywell (click ticker for report: ) and other firms in the aerospace supply chain such as Rockwell Collins (click ticker for report: ) and Hexcel (click ticker for report: ).
All things considered, we think the lithion-ion battery problem will mark the bottom in sentiment for the 787 Dreamliner, and we’re not making any changes to the aerospace exposure in our Best Ideas portfolio.