“Ryanair says it stopped discussions to buy as many as 200 Boeing aircraft. The two sides did apparently agree on price but Boeing would not incorporate other terms…” — CNBC’s Squawk on the Street 12/18/2009

Boeing (BA) stock is under pressure today as negotiations over a large order with Ryanair (RYAAY) have run aground.  According to the various news reports, the issue is not with the price but certain other contract terms which would have allowed Ryanair to extend terms on this contract into future deals between the companies.  Obviously, an order of this size, about 200 airplanes, would have represented a substantial multi-year revenue stream to Boeing.  Shares are trading down about 2% on above average volume.

The aircraft at issue is Boeing’s Dreamliner which has been a thorn in Boeing’s side for some time, as more than two years of delays have frustrated investors and airlines alike.  Last week, Boeing finally took the Dreamliner for a test flight and appears to be ready to start producing the airliners soon.  The planes are made of lighter materials and will help airlines reduce costs on fuel going forward.  Many airlines are crippled by the high and potentially volatile costs of jet fuel that lessening this exposure is certainly exciting to them.  However, the delays have frustrated some into canceling or postponing orders as Australia’s Quantas and other carriers have done in recent months.  The now defunct order for Dreamliners were to be delivered between 2013 and 2016, and will not affect the current order for 112 Dreamliners to be delivered before the end of 2012.

London’s Financial Times reports that this move may continue a shift in priorities among Ryanair executives away from growth and towards increasing shareholder value.  Ryanair has focused on growing operations and reinvesting cash flow for basically its entire history, but is now seriously considered paying a dividend for the first time.  The speculation is that with this new order no longer on the capital expenditure budget the airline may offer a one-time special dividend instead.

Boeing still has a healthy backlog of orders to work their way through, and if the initial rollout of the Dreamliner goes well the pipeline for 2013 and beyond will likely fill up nicely. This is just a noteworthy trend as this is not the first firm to back off on orders for the embattled 737 Dreamliner.  Also, it shows a potential long term shift in focus for the Irish airline known as one of the fastest growing airlines in Europe.  Interestingly, as of our most recent reports, we have Boeing rated as Fairly Valued, but Ryanair’s ADR rated as Undervalued.

It wasn’t supposed to go this way.  Boeing (BA) was again forced to delay the 787 Dreamliner, an important model in the Boeing line which is already two years over due.  The project has become somewhat of a joke because of the repeated delays on this important plane.  This time there are concerns with the structural make up of the airplane where the wing attaches to the fuselage and titanium or aluminum reinforcements will be brought in to ease any stress points.  Furthermore, outsourcing supplies has made assemblage more complex than hoped.  Boeing’s CEO tried to assure everyone that adjustments such as these are not uncommon when designing an aircraft, and he says the choice of lighter materials is not the reason for such issues.  However, this has done little to assuage investors and customers that have lost patience with the string of disappointments.  The most recent disappointment came when Australia’s Quantas Airways when they canceled half of their large order for 30 aircraft, citing a difficult operating environment and the need to restrain capital expenditures.

Boeing stock has taken a hit from the string of bad news, as the stock is down 13% since the announcement.  The 787 project has dragged on for a very long time and was not helped by a labor dispute during production.  The company has put a lot of time and energy into making the Dreamliner, and now it will not be ready for delivery for another couple of weeks at minimum.  There has been no timetable released yet, and details will become available as Boeing gets a better handle on the problems. 

There is no way that the last week, nor the last year could be described as particularly successful for Boeing.  However, keeping an eye towards the future, we think Boeing still has a lot of growth potential.  The Dreamliners huge selling point is that by using less heavy construction materials it will be 20% more fuel efficient; fuel being one of the largest (and highly volatile) expenses that struggling airlines have dealt with over the past few years.  Boeing’s backlog of business has ballooned to record levels, nearly $350 billion at one point in late 2008.  Even though Quantas is saving about $3 billion by cutting down their order, that is a drop in the bucket for Boeing’s backlog.  Obviously, Boeing does not want to lose any orders, but at this point that have enough work to keep them busy for a very long time.

It seems there is a feeling in the market that Boeing just can’t get itself straightened out right now.  Although, we currently had Boeing’s valuation at Fairly Valued coming into the week, we think that it is now down to levels where the value is extremely hard to deny.  The stock might not break out of these low levels for the next few weeks, but it is reasonable to predict that in a year or two Boeing will be higher, possible much higher.  The stock is trading at just over 9x fiscal 2009 expected earnings, and the shares are well below the range that we would expect to see them trade in given the current fundamentals of $49 to $63.  America’s largest exporter has a game-changer in the pipeline, and when it does indeed make it to market you can bet that the stock will not be at these low valuations.