Investors betting on Dreamliner

As Boeing chief executive Jim McNerney held court in Airbus' backyard at the Paris Air Show last June, he made a promise: He told Wall Street analysts he'd be throwing a party in two weeks — after the 787 Dreamliner's first test flight.

The plane, which is so radical that its fuselage is formed by wrapping composite-plastic tape around a mold and then baking it, was already two years late for its trial. The delays had crushed Boeing's credibility and helped drive shares down to $51.44 as the show opened, from a record $107.83 in 2007.

The celebration wasn't to be. Back in the United States, as McNerney was driving home from Waukegan Regional Airport in Illinois, he got a call from Scott Carson, who was then president of Boeing's commercial aircraft division. Engineers had found separations in layers of plastic where the 787 fuselage meets the wing.

The only option was another delay. News of the postponed flight sent shares tumbling a further 6.5 percent on June 23.

Boeing reinforced the wing joint with titanium, and the Dreamliner flew its much-anticipated three-hour test over Washington state on Dec. 15, almost six months later.

Seated in a Boeing conference room 36 floors above the Chicago River on a blustery March afternoon, McNerney, 60, recalled the June delay.

"It was a tough day, but you've got to be levelheaded around here," he said. "If I get as excited as I want to be about all the cool stuff that happens and as disappointed as I want to feel when stuff doesn't go well, I'd be a Raggedy Ann doll."

Shareholders, who were gathering in Chicago for the company's annual meeting on April 26, can relate to that. After watching Boeing stock hit so many peaks and valleys in two decades that its price graph resembles a mountain range, investors are betting the Dreamliner will put Boeing back on the upswing.

"Once Boeing starts delivering the 787, the earnings power will double and the stock will double," predicted David Pearl, co- chief investment officer at New York-based Epoch Investment Partners Inc., which owned 2 million shares of the Chicago-based company as of Dec. 31.

Boeing shares jumped 51 percent to $75.13 in the six months through April 23. The increase, almost four times that of the Standard & Poor's 500 Index, lifted the company's price-earnings ratio to 39.7, greater than 88 percent of the index's members.

Since July 2005 — when McNerney took the reins as chairman and CEO after two ethics scandals had rocked the world's biggest aerospace and defense company, the shares have returned 26 percent, double the 13 percent gain for the S&P 500.

Boeing is the only stock with enough liquidity for large-cap portfolio managers looking for aerospace growth, said David Rowlett, a Baltimore-based analyst at T. Rowe Price Group, whose firm owned 7.9 million shares in December. "They can generate a lot of cash if they get the 787 right."

Getting it right hasn't been Boeing's forte. The Dreamliner, a two-engine jet that will travel 8,500 nautical miles while burning 20 percent less fuel than competitors, won't earn back Boeing's original investment of about $15 billion until 2018 or later, predicted Heidi Wood, an analyst at Morgan Stanley in New York.

Last year, Boeing's aircraft orders tumbled 79 percent to 142 amid the worst travel slump since World War II. Profit plummeted 51 percent to $1.3 billion. The company swallowed $1.8 billion in reduced income because of an International Association of Machinists and Aerospace Workers strike in 2008. And it lost its lead contractor role when the Pentagon canceled the $159 billion Future Combat Systems program, hurting the defense business that delivered 49.1 percent of Boeing's $68.3 billion in 2009 revenue.

On April 21, Boeing said first-quarter net income fell 15 percent to $519 million and revenue dropped 7.8 percent to $15.2 billion.

The 787 has added to the misery. Not only was the Dreamliner the first airliner designed largely with composite materials instead of metals; Boeing also farmed out entire pieces for suppliers to design and build. The company planned to assemble the plane in three days at its Everett, Wash., campus, joining the nose, wings and fuselage into a wide-body jet that could seat up to 290 people.

Boeing and Airbus constantly jockey for orders from the world's 100 major global airlines, New York-based aerospace consultant Wolfgang Demisch said. Winning can come down to price, shrinking pretax profit margins below 10 percent and forcing endless restructurings.

"McNerney is trying to do something that's really hard to do," said Charles Smith, chief investment officer at Pittsburgh-based Fort Pitt Capital Group Inc., which owned 236,000 shares in March.

The 787 will determine McNerney's place in history, Smith said. "If two years from now he's producing eight or 10 787s a month, we'll say he was very capable," he said. "Until then, the jury's out."