|BA--Boeing article from Chicago|
Hewing to new course
Boeing tries to pierce fog of investor doubts about new identity
In a test high above the Pacific Ocean two months ago, a ground-based missile fired from a South Pacific island successfully destroyed an incoming dummy warhead.
The test was hailed as the opening shot in President Bush's bid to build a national missile defense system. And as the lead contractor on the team, Boeing Co. earned a $36 million bonus for its work.
At a time when Bush is pledging to invest billions of dollars in new weapons, Boeing might well be expected to ride high, despite the downdraft that has gripped its passenger-jet business.
Too bad Wall Street hasn't signed on to Chairman Phil Condit's plan to expand Chicago's newest corporate citizen into a leading player in satellites, information services, aircraft servicing and finance.
Since May 17, shortly after Condit announced Chicago would be Boeing's new headquarters, the company's shares have tumbled 25 percent, to $51.20 from $68.79, wiping out more than $14 billion in market value.
By way of explanation, a Boeing spokeswoman noted that Wall Street "doesn't like uncertainty."
No question, the doubts run deep.
Wall Street still considers Boeing a long way from completing its diversification--a program that helped prompt the company's move from Seattle to downtown, which happens Tuesday. "The jury is still out on whether they will be able to make a big difference to the bottom line," said Robert Friedman, aerospace and defense analyst for Standard and Poor's Corp.
Meantime, to many investors, the company remains essentially a commercial aircraft manufacturer, highly vulnerable to cyclical downdrafts.
As Robert Toomey, aerospace and defense analyst for Dain Raucher Wessels, noted, "The stock has historically had a very strong tie to the outlook for commercial orders."
Indeed, commercial aircraft orders accounted for nearly $31.1 billion, or 61 percent, of Boeing's $51.3 billion in revenue last year. Many analysts say that huge business is likely to stumble as domestic and foreign carriers cut capacity in the face of a softening global economy.
At the same time, Boeing's fiercest rival, European aircraft consortium Airbus Industrie, is pushing hard to snatch Boeing's crown as the leading aircraft maker.
The fight is ongoing. Last month, Boeing convinced Chinese government officials to order 36 Boeing 737 passenger jets--the company's largest single order this year.
Even with that order, Boeing's total for 2001 of 228 planes remains well short of Airbus' 318. Many experts expect the Chinese government, eager to expand its number of aircraft suppliers, will award Airbus an order for a similar number of jets.
Given that competition in its main business, Boeing's focus on new ventures becomes even more critical.
When Boeing announced plans to relocate its headquarters to Chicago from Seattle earlier this year, the company cited the need to make a clean break from its manufacturing roots in Seattle.
"Our core businesses have solid, steady, fundamental growth of about 5 percent," Condit told shareholders earlier this year. "We want to do better than that by leveraging what we know best."
As Boeing spokesman Larry McCracken explained, that means pioneering new markets and selling new services to familiar customers.
The company's effort to convince Hollywood that a better way to distribute films to movie theaters is via Boeing's satellites rather than 300-pound film canisters is an example of Condit's vision, McCracken said.
None of it is simple, though.
Among the more developed of the ventures is Boeing Capital Corp., a unit that provides financing to airlines and other businesses that became part of Boeing with the acquisition of McDonnell Douglas Corp. Last year, the division booked $4 billion in new business for aircraft orders.
But it is competing with two of Boeing's largest customers: Los Angeles-based International Lease Finance Corp. and the aircraft leasing unit of General Electric Co.
Many analysts believe that ILFC's order of 110 Airbus passenger jets at this year's Paris Air Show was a warning to Boeing to tread lightly in a business that ILFC and GE dominate.
By the same token, Boeing's bid to build its aircraft maintenance operation will be competing against the same customers, such as Lufthansa, that buy Boeing's planes. Many airlines book significant revenue doing maintenance work for smaller carriers.
It will be years before Boeing sees meaningful financial returns from its other major ventures: Connexion by Boeing, which provides air travelers with Internet connections at $20 an hour; an Air Traffic Management system that could supplement or replace existing government-run systems; and a new maintenance and repair unit.
No one on Wall Street is counting on revenues or profits from those projects at the moment, analyst Toomey said.
The Internet plan in particular is a wild card, he said. "No one knows how many people will want to surf the Net once they are on board."
Boeing has signed contracts with the three largest domestic carriers, United Airlines, American Airlines and Delta Air Lines, to begin offering the service sometime next year.
The company's plan to develop an air traffic control business is even more long-term.
It could take as long as a decade for Boeing to convince the Federal Aviation Administration that there is a better system for steering aircraft across the sky than the agency's current, multibillion-dollar system.
So it's with an eye to the distant future that Boeing's space and communications group invested $3.75 billion last year to acquire Hughes Electronics' satellite-manufacturing business. That's expected to become a key to Boeing's efforts to install its satellite-based air traffic management system.
One bright spot is the military.
Boeing was a relatively modest player in the defense sector until 1997, when it acquired St. Louis-based rival McDonnell Douglas in a $13.3 billion deal. McDonnell's commercial-jet business had largely withered, but its military sales were much bigger than Boeing's.
Earlier this summer, test flights for the X-32B, a new jet fighter that could be built in St. Louis by the company's Military Aircraft and Missiles division, were completed successfully at a Maryland naval air station.
The new fighter jet is Boeing's entry in a $20 billion winner-take-all competition to build the Joint Strike Fighter, a jet that will serve the Navy, Air Force and Marines as well as Great Britain's Royal Navy. Boeing is facing off against Lockheed Martin for the order.
For William Hummer, co-owner of Chicago's Wayne Hummer & Co. investment firm, the military side of Boeing could potentially boost the stock, including another fighter jet, the F-22, that Boeing will help build. "That is very bullish."
But Standard and Poor's analyst Friedman sees a long road ahead for the soon-to-be Chicago-based company: "There are a lot of roadblocks to fast growth [and] high profits in these areas."