Late yesterday afternoon, airplane manufacturer and designer Boeing (click ticker for report: ) received approval for the company’s plan to test and certify batteries for its 787 Dreamliner jet. Boeing’s lithium ion battery issues plagued several of its new jets, including many in Japan, which caused substantial weakness in shares even though orders remained strong, and several industry insiders indicated the problem wasn’t anything out of the ordinary. On January 17th, we called for the bottom in sentiment regarding the Boeing 787, and shares of the company have rallied 13% since.
Although we did not believe the lithium ion battery would be a long-term headwind for Boeing, several market participants wondered if the company could develop a satisfactory solution, weighing on shares. According to Ray Connor, CEO and President of Boeing Commercial Airplanes, the company and its battery consultants have derived a solution, and Connor provided some greater detail, saying:
“Our proposal includes three layers of improvements. First, we’ve improved design features of the battery to prevent faults from occurring and to isolate any that do. Second, we’ve enhanced production, operating and testing processes to ensure the highest levels of quality and performance of the battery and its components. Third, in the unlikely event of a battery failure, we’ve introduced a new enclosure system that will keep any level of battery overheating from affecting the airplane or being noticed by passengers.”
The odds of another battery issue look lower now, in our view, but we will not be changing our fair value estimate for shares of Boeing since we did not revise our estimate downward in response to the battery hiccup. We believe shares of Boeing are fairly valued, and we’re much more bullish on the aerospace supply-chain than OEMs. Eliminating the battery risk could be a positive catalyst for the entire supply-chain, especially since it reduces timing issues.
Boeing continues to have a backlog of $390 billion, and we believe suppliers like Astronics (click ticker for report: ), Precision Castparts (click ticker for report: ), and EDAC Technologies (click ticker for report: ) have a long runway for revenue and earnings growth because of it.
EDAC reported fantastic results last week, and shares still look inexpensive even after rallying more than 200% since we identified the name as incredibly undervalued for our subscribers. It continues to look like the most undervalued name in the space, but Precision Castparts and Astronics are also members of our Best Ideas Newsletter, so we have tremendous confidence in the sector.