The Once of Future King of Aerospace

Boeing, which has seen its stock go from a high of $107 to a low of $71 during the last year, the roller coaster ride is likely to continue, but the future is looking brighter. The company is the giant in aerospace industry, with a market cap of more than $57 billion with its hands in both the lucrative defense business as well as the cyclical commercial airplanes business. The combination of increased defense spending, and the game changing 787 has helped to double the company market cap since 2003. Yet it has seen several large setbacks in last year.

On the commercial airplane side, the blockbuster 787 which was introduced in 2004 had racked up a total of almost 900 orders before the plane ever took off the ground. The key to the success of the airplane lies in two large gambles that Boeing made. One, it decided that the commercial air travel market would move toward a point to point connection versus the more traditional hub and spoke system. Two, Boeing gambled on a design that had up to 50% composites that in combination with its GE or Rolls Royce engines would provide up to 20% fuel efficiency. These two decisions, along with the ever increasing cost of fuel and the shift in market sentiment regarding travel allowed Boeing to get back into the lucrative long haul market that it had ceded to Airbus when the latter introduced the A330 in 1992.

For the integrated defense business, Boeing’s business has been on the rise since Sept 11. It continues to supply older generation combat aircraft such as the F-18 E/F, transports like the C-17. It also continues to provide logistics and support services for even older aircraft such as KC-135 tankers as well as the venerable B-52s. In addition, there are also new businesses for up to 108 P-8 maritime patrol aircraft as well as satellite launch systems and other defense related items altogether providing the business unit with more than $30 billion in revenue a year.

However, Boeing has suffered a number of serious setbacks in both business units during the last nine months. On the defense side, based on the GAO (Government Accounting Office) ruling, the Air Force is taking another look at the award to Boeing for 141 CSAR-X (Combat Search And Rescue) helicopters. Boeing had also lost a lucrative $40 Billion contract to supply 179 KC-X mid-air refueling tankers to rival EADS in February. Then there are the numerous delays on the 787 that are likely to incur compensation costs for its airline customers and the failure of its 747-8 to move beyond its launch customer (Lufthansa) for passenger service. The delay in the 787 has opened the door for the Airbus A350XWB – the belatedly launched rival to the 787. A delay would enable Airbus to gain market by providing open production slots for airlines desperately looking for more fuel efficient planes. Collectively, these missteps has knocked Boeing shares to their 52 week low.

The delays on the Boeing 787 stems in part from Boeing’s move to more of a systems integrator format as it subcontracts out vital parts such as the wings and the fuselage. They ran into trouble due to delays in the subcontractors which in turn pushes the delays onto the integrator. Of particular concern is the need for Boeing to redesign the wing box (a major component on any airplane) for the 787, this implies that the engineering would not be available for other projects such as the larger version of the 787, a stretched version of the 777, or even the replacement for the single isle 737. The delays are highly reminiscent of Airbus’s delays with the A380 that in turned delayed their launch of the A350XWB.

On the defense front, the loss to EADS on the tanker business is particularly difficult to swallow given that Boeing has dominated this business ever since there was an aerial refueling tanker. This coupled with a possible loss of the CSAR-X project, and the likelihood of reduced defense spending if the Democrats win control of the White House could be a disaster for Boeing’s defense business.

However, for Boeing, there is definitely a glimmer of hope going forward. The 787 despite its delays is still a much needed aircraft due to skyrocketing fuel costs, and there is even good news in that the aircraft has reached its first critical milestone: the power on process. Although this will not keep Boeing from being hit with compensation costs, it is a step in the right direction where it is now more likely that Boeing can achieve its first delivery in Q3 of 2009. The other bit of good news is that GAO that gave Boeing so much trouble on the CSAR-X project has delivered its verdict on the refueling tanker protest that the company filed. While this doesn’t mean that the Air Force decision is being reversed, it does mean that Boeing now has a chance to compete again in the tanker business. With the election year looming, it would be difficult to bet against Boeing especially when politicians are faced with the option of off-shoring a critical defense project.

Where does this put Boeing stock? For the near future, it is likely that Boeing will remain in the 70s range where it has been languishing for a good part of the last three months. But if things continue to improve, for example the maiden flight of the 787 is not delayed, it is likely that Boeing stock will end at the mid 90s before year end.

Another week... changes are needed

The problem this week was that there was just a bit of action, all of it was poor. Pretty much everything I have is underwater. This basically means that it's a waiting game now. I have faith in most of the stocks that are in the portfolio, but the question is how long to wait. I guess I better learn patience here. One interesting thing though, I haven't been as active in my more regular analysis of business lately. This is something I'm much more interested in anyway. I think the next one will be going back to my favorite subject, aerospace and the airline industry.

Sector Review of the Portfolio

Friday was certainly interesting, oil prices shot through the roof and managed to take all of the stock market down with it. As it stands right now, the portfolio could do a lot better. Right now, 32% of the portfolio is invested in alternative energies, and as of Friday all of them look to be in sad shape. Why? This is because as oil goes up, these companies should be rising in parallel, however, given the decline, the worry is if oil comes down, there wouldn't be nearly as much urgency in the success of these stocks.

The only thing to do now is to wait for a bit, the most obvious target to divest are the solar stocks. Having had some success with these last year, it's looking more and more like these stocks have hit the top, and there isn't much more left to go before they tank. This leaves a potential wind play and a clean diesel company. Both of these are somewhat speculative. The wind play will move ahead if the US congress pushes through the PTC (Production Tax Credit) for renewable energy. The clean diesel is as much a China play as it is an alternative energy play, that's something worth keeping since energy needs will continue to be there for China no matter what happens in the US.

Moving on, the little stake in financials was probably not the best play, but it's only a small stake. The question is how much more does Citi have to drop, with the news out of Lehman Brothers, it certainly seem like there is more room to fall for the financials. This could also be divested when it gets above water, this would be especially true given that the US economy will likely still end up in a recession this year or early next year. Visa is still a good bet, but probably need to come down a little from present levels.

On the biotech side, DNA is fairly solid if not spectacular right now, Dendreon on the other hand is just a pure speculation play. The Provenge drug is its only shot for Dendreon, so if there is any positive news, this stock goes up. For now at least, the portfolio can stand a rather small percentage of biotechs.

The dry bulk shipping stocks is just a simple play on continued Asian expansion. A majority of that is with China. Given the recent earthquake and the need to rebuild, this is a safe play although one that's losing a lot of money right at the moment. The event that could derail this is if China's economy go into the drain, then the commodities are no longer the best play and the commodities transport sector would go down the tubes as well.

WWE for entertainment stock is a bit dangerous, certainly the US market will be a slow one for WWE. But there is an advantage in having a not so bad dividend. But this stock is probably not quite the keeper like an Apple. This one will probably see some profit taking once the ex-dividend date passes.

Finally, Intuitive Surgical is more of a medical devices stock than a technology stock. This is a real momentum stock, and one that has stalled a bit of late. The best chance is for Intuitive Surgical to expand its sales internationally, but the prospect of reduced costs on surgery will still have some appeal going forward
in a down economy.

May is finally over....

That's about the only good thing that has happened this month. For the week, I reinforced my position on Gushan and added to the solar portfolio with STP. The main problem right now is that I have too many stocks, and that needs to be changed up a bit. The key ones right now aren't doing well, these include Genetech, First Solar, and Intuitive Surgical, although they're quality stocks, these are not likely to last for long as they become supplanted by other high growth stocks. Currently, it seems that I have a lot more stocks in the alternative energy sector, STP, FSLR, GU, WGOV, and ENER, these make up close to 35% of the portfolio. So, may be there will be some consolidation along this sector shortly. Overall, May was a bit of a loser month. We'll have to see how June turns out, and that might set a better tone for the rest of the year.

Tough Week, nowhere to go but down from here

What a tough week. More lessons reiterated, the key one being always take profit when its there. I sold Apple and Gushan after watching those drop much of the week. Selling Apple was a mistake, the only hope is that sometime next week, the stock will resume its drop sufficiently to buy back in. With Gushan, the sale should've come at $17 or so instead of watching it go down to $15 before selling. This was one of those costly mistakes that one can only regret in hindsight. Selling Rio was probably a good move though considering how much it went down at the end of the week. There should also be an entry point there somewhere.

Although this week has been a bit of an eye opener as well. Bought into a few other beaten down stocks, Citigroup, WWE, Dendreon, and First Solar were all picked up. Although First Solar was bought on averaged down basis, added further to the position every time the stock went down. Given the continued rise on energy prices, FSLR is a continued good bet. Citigroup has also been beaten down over the last couple of weeks, started a small position there that may be added to as time goes on, generally the financials look like they've nearly bottomed, so, now might be a time to cautiously start picking some up. WWE is going to be another one that will have more of a position added onto it going forward, there is a nice little dividend that should happen in mid June, which has a prospect of boosting its prices in the next couple of weeks. Finally, Dendreon is the speculative play, having come down quite a bit lately, it was time to move back in a little and see if there is a quick pop and some fast money that can be made, but realistically, with Dendreon until Provenge (their cancer drug) gets approved, they will be stuck in the $5 range.

The week though has managed to help me solidify my thinking on strategy a bit more. The first is that my portfolio has to be split into three parts, core holdings where good long term companies like Apple will be held, secondary holdings that will trade in and out of speculative stocks like a Dendreon, and then just a small cash position to look for new possibilities. The problem though is that it'll take some time to get to this stage. Another interesting lesson is averaging, this is something already known, but had to be reinforced. Gushan was a good example of averaging while the stock is going up, and managed to get decent gains even if timing wasn't so great. Now, FSLR is going to be another test case, the stock dropped heavily this week, strange given the surge in oil. Having bought it on the way down, this is definitely still a stock that has legs, so I think it'll have some room to bounce back up, only time will tell if I'm right on this.

Overall, May has been an unkind month, but it isn't over yet. Hopefully, the foundation is being laid for some decent gains going forward.

Tough Day

No doubt about it, it was a tough day on the street, down nearly 200 points. Most of the portfolio held up well. But of course, Dryships was a disaster. Somehow that's not much of a surprise right now, given that this was one of those stocks that have been moving up in anticipation of earning, and now it decides to drop. No choice but to hold on to this for a little while and see how it plays out, since it's a small position, no big loss. Closed out the position on RIO though, although not at the most favorable price, this is also one that has had a bit of a run.

On the other hand, WGOV has been a disappointment just like DNA, and ENER looks like its stuck in a trading range just like AAPL, and ISRG. FSLR on the other hand had a not so bad day given the state of the market. Asia looks like it is dropping again for Wednesday, so it will likely mean a down day for stocks yet again. Given the continued currency weakness, it is likely that energy stocks will continue to surge. This should be the overriding theme of this year. Meaning, the portfolio might have to switch from its tech focus to more of an energy focus for the rest of the year.

Monday: May 19, 2008

Today was rather interesting. Pulled some money out of Gushan (GU) and then made a m0ve into a transport Dryships Inc (DRYS) and just a small position back into First Solar (FSLR) thanks to the big drop today. Tomorrow is likely to be a down day, Asia is showing some signs of weakness. This may be time to move out of a position like Apple (AAPL) at least for the short term since momentum seem to have stalled there for the moment.

The DRYS move this morning was likely a mistake, got caught trying to turn a quick buck even though the stock has been on a tear lately and has nearly doubled. FSLR may also be a mistake since there is a good chance this one goes back down to $280, but a small position at $292 won't hurt. Unless the demand for oil suddenly drops, the alternative energy play will continue to remain a good one for the long term. So, if there is a lot more weakness this week, it may be an opportunity to further add to the positions, especially if in companies like FSLR and GU.