Boeing Co. is worth holding despite its recent problems

Taking Stock

Your Money

March 07, 2004|By ANDREW LECKEY

I own shares of Boeing Co. and don't like the bad news I've been hearing lately. What's the outlook for the company?

- S.R., via the Internet

Boeing definitely has an image problem. The world's largest aerospace company has experienced the surprise departure of two top executives as well as lower sales and profits.

Chief Financial Officer Michael M. Sears was fired by the board of directors amid accusations that he violated company policy in dealing with a controversial proposal to lease and sell refueling planes to the U.S. Air Force. The subsequent fallout included Chief Executive Officer Philip M. Condit resigning, 150 job cuts and an investigation by the Pentagon's Office of the Inspector General.

Harry C. Stonecipher, a board member and retired Boeing executive, was named CEO and pledged to convince U.S. officials that Boeing isn't "a bunch of crooks." Fellow board member Lewis E. Platt became chairman, while veteran Boeing executive James A. Bell was chosen CFO.

In 2003, Boeing had been suspended from bidding on Air Force rocket launches worth an estimated $1 billion after admitting that its workers possessed thousands of documents stolen from rival Lockheed Martin Corp.

Sales of Boeing's commercial airplanes are down because of the continued problems in the airline industry. In addition, European-based Airbus last year ended Boeing's run as the manufacturer delivering the greatest number of aircraft.

On the positive side, Boeing continues to dominate the thriving discount carrier market with its popular 737 aircraft. Defense revenues are up at the company, which is the No. 2 defense contractor. The Bush administration's defense budget includes significantly higher spending on new weapons.

The company has definitely become more efficient, and its balance sheet is in good shape.

Boeing shares are up 6 percent this year, after last year's 30 percent gain. Assisted by a $1.1 billion federal tax refund, Boeing's earnings in its last quarter were $1.11 billion, as opposed to $590 million a year earlier.

Based on the various risks involved in Boeing's business, the consensus recommendation on its stock among the Wall Street analysts tracking it is currently a "hold," according to First Call, a Boston research firm. That consists of eight "buys," 11 "holds" and four "sells."

Boeing earnings are expected to increase 85 percent this year, compared with the 21 percent forecast for the aerospace defense industry. Next year's expected 14 percent increase compares with an anticipated 16 percent gain industrywide.

Its projected five-year annualized growth rate of 10 percent is 1 percent less than the forecast for its peers.

I have nearly $100,000 in my retirement account. My financial adviser suggested that I sell all the shares I own in Scudder Small Company Value Fund because of recent scandal concerns. What's your opinion of the fund?

- R.F., Richmond, Va.

Because of all the uncertainties surrounding the Scudder Funds, no one should be rushing to invest in this fund right now, and cautious existing investors may not want to stay the course.

In January, Deutsche Asset Management, the adviser to the Scudder Funds, disclosed that it previously had an arrangement with an investment advisory firm to permit rapid trading in five of its international stock funds.

Those timing deals that put the favored few ahead of average investors were the work of the former management team in charge of the company, most no longer employed there. Deutsche hasn't disclosed whether any of those managers still on board knew of the deal.

"Scudder is involved, but Scudder Small Company Fund specifically isn't involved," explained Greg Carlson, analyst with Morningstar Inc. in Chicago. "However, we are recommending that because of the scandal, people shouldn't send any new money to the Scudder offerings."

While nobody has been charged at this point, uncertainty remains. Carlson believes there are better options among small value funds, namely Royce Special Equity (RYSEX) and Royce Total Return (RYTRX).

The $290 million Scudder Small Company Value Fund (SCSUX) gained 58 percent in value over the past 12 months and had a three-year annualized return of 14 percent. Both results rank in the top half of all small value funds.

This quantitatively run fund uses the Russell 2000 as its benchmark and, in order for that to work properly, low expenses are helpful. Its 1.21 percent annual expense ratio is about to increase to 1.5 percent, according to its prospectus, which could be a significant hurdle for management to overcome. Its return has trailed the Russell 2000 for the past two years.

Nearly one-third of Scudder Small Company Value assets are in financial-services stocks, with significant concentrations in industrial materials and business services. Its largest holdings were recently Flagstar Bancorp, Russell Index futures, Energen, Kellwood, Zale, R&G Financial, LandAmerica Financial Group, Cooper Tire & Rubber, John H. Harland and Nordson.

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