Reports that Boeing Co.’s Dreamliner program is the focus of a federal Securities and Exchange Commission investigation sparked a sell-off of the stock on Thursday, but some analysts say the concerns are overblown and shares rebounded slightly by the end of the day.
Bloomberg News was the first to report that the SEC is looking into accounting practices for the popular wide-body Dreamliner, which is built at Boeing’s campus in North Charleston and in Everett, Wash.
The report, based on an anonymous source, sent the company’s stock spiraling by as much as 12 percent to touch a 2½-year low of $102.10 a share before finishing the day at $108.44. The volume of shares traded was seven times higher than the daily average.
Boeing spokesman Chaz Bickers and the SEC declined to comment on the Bloomberg report, and no documents related to an investigation have been filed with the agency.
Bloomberg said the probe also affects Boeing’s 747 program.
The investigation report and subsequent stock trade-off followed news Wednesday that Boeing will cut its workforce in the commercial airplane business and an earnings announcement last month in which the company said it will cut production of some models this year.
Boeing’s shares are down 25 percent this year, helping to pull down the Dow Jones industrial average by 10.1 percent since 2016 trading began.
The Bloomberg report was met with caution by most analysts, but not all see the news as having a long-term impact.
“While this is a near-term negative that may overhang the stock and could lead to a large charge or fine, we remain positive on the large backlog of business Boeing has accumulated, and remain positive on overall aerospace demand,” Jim Corridore with S&P Global Market Intelligence said in a statement.
Corridore said he would like to see Boeing officials offer “some clarity on the size of the issue.”
Saj Ahmad, chief analyst for Strategic Aero Research, called the stock dump “a knee-jerk reaction.”
“It’s too early to tell what ‘smoking gun’ the SEC aims to find, because Boeing has been reporting their quarterly earnings to them ever since the 787 program ran into trouble in the fall of 2007,” Ahmad said, referring to the Dreamliner’s early financial woes.
“I suspect the SEC wants to see correct program accounting costs and how these fit in with prior earnings releases,” Ahmad said. “But until such time the SEC makes known what they’re after, it’s speculation to assume anything is untoward, especially if Boeing can justify any question marks that may surround any of the costs attached to either the 747-8 or 787 programs.”
The SEC review reportedly centers on a legal accounting method that lets Boeing spread the significant costs of starting a new program, like the Dreamliner, over many years of building and delivering the planes.
Boeing says the practice is necessary because most of a program’s expenses are in the startup phase of engineering, design and initial production and the planes get cheaper to build over time.
Critics of such accounting, however, say it can hide potential losses.
The Bloomberg report says investigators are looking at whether Boeing’s sales projections were too optimistic and that it may have overstated how much money will be saved as production matures.
A whistleblower provided documents to the SEC about Boeing’s accounting practices, the Bloomberg report states, which led to the investigation.
Greg Smith, Boeing’s chief financial officer, said during a conference call last month that the Dreamliner program has about $28.5 billion in deferred production costs. Smith said the program has started to make a profit on each plane sold and the deferred costs will be reduced as more planes are delivered.
Boeing has a backlog of about 800 Dreamliner orders, but forecasts it will take about 1,300 deliveries to erase the deferred production costs.
Some analysts, however, say Boeing will have a difficult time meeting its projections because of slowing economies in key Asian markets and cheap oil that is giving airlines an opportunity to delay or cancel purchases of new, more fuel-efficient planes.
Richard Aboulafia, vice president and aerospace analyst at Teal Group, told attendees at this week’s Pacific Northwest Aerospace Alliance conference that Boeing would have to cut the Dreamliner’s current production costs by 35 percent to pay off the deferred expenses and turn a slight profit.
“That’s a real problem,” Aboulafia said, according to a report in The Seattle Times.
Boeing announced cost-cutting measures Wednesday, saying the company will trim its workforce, starting with executives and managers. Boeing spokesman Doug Alder said other cuts will come through attrition, voluntary layoffs and — as a last resort — involuntary layoffs.
Boeing employs about 7,500 workers in North Charleston at facilities that include the 787 assembly plant, a propulsion facility, an airplane-interiors manufacturing site, and a research and technology center.
It is not clear when workforce cuts would begin, to what extent they will occur or how much they will impact Boeing’s North Charleston operations.
The cost cuts aren’t limited to human resources, according to The Seattle Times, which reported some Boeing divisions have even stopped providing bottled water to its workers.
Reach David Wren at 843-937-5550 or on Twitter at @David_Wren_