|Shares Out. (in M):||614||P/E||16.5||14.7|
|Market Cap (in $M):||87,848||P/FCF||12.6||11|
|Net Debt (in $M):||-1,600||EBIT||8,365||8,750|
Boeing (BA) is significantly mispriced and offers a highly compelling risk/reward profile. Boeing is one of two key OEMs in the global aerospace industry, which features long-term growth well in excess of GDP, primarily due to increased affordability of air travel. With a powerful moat, BA has excellent and growing returns on capital. Boeing generates a 29% ROIC on just 9.5% margins, which management believe can rise to mid-teens over time. At the low end of our estimates, Boeing will generate $13 of FCF/share in 2017, $15.31 in 2018 and $18.49 in 2019. Boeing has historically traded at 15-17x; using a low forward multiple of 12x to account for the current position in the book/bill cycle, BA would be worth $184 by YE17 and $222 by YE18.
In December, Boeing will raise its dividend to $5-5.50/share for a yield at the low end of 3.5%. On the 4Q release, Boeing will guide to at least $13/share in 2017 with potential for upside.
Since BA is a highly liquid, blue chip company which should be efficiently priced, why does this opportunity exist?
- First, sentiment on the stock is muted. Short interest is 8 days to cover. Another example is BA hasn’t been written up on VIC since 2004 and that write up had no messages.
- Second, the market is overly concerned with book/bill cycle. Sell-side bears are overly focused on a lack of widebody orders this year and the industry book/bill of likely less than 1x this year.
o This cycle is different, since it has been driven more by new product introductions than underlying air traffic fundamentals, which led to significant pull forward of orders in 2013 and 2014 as several new models were launched.
§ Nevertheless, this bear case does have some merit, but was much more compelling in 2013, when book/bill (and, in turn, BA’s multiple) peaked. By 2016, book/bill will likely be under 1 (again primarily due to a pull forward of demand) and resulting long order books.
§ Valuation more than takes into account a bear case. In a severe recessionary scenario, it is difficult to get to trough FCF of anywhere less than $10/share outside of a one-time working capital hit.
- Third, BA uses unique program accounting which attempts to average out prices/margins over the course of its programs. While not diving deep into the details of program accounting here, BA’s adjusted EPS over the past several years was significantly higher than its cash EPS, as BA booked profits on 787 while the 787 actually burned $28bn of cash. 3Q16 results marked the inflection in that trend with the 787 cash flow now significantly outpacing booked profits. While 3Q16 results marked an inflection, the bears continue to say the program has a long way to go to live up to its promised 25-30% cash gross margin profile. The 787 will be at least a 20% gross margin business as a result of initial price penalties on the heavily delayed initial deliveries phase out, mix benefit with the -9 and -10s significantly more profitable than the -8s, supplier step downs as the program matures and Boeing’s own productivity curves (i.e., assembling unit 600 will be cheaper than unit 500).
- Fourth, BA suffers from management credibility issues. While management is in fact credible, Boeing management speaks to a number of different constituencies and balances their rhetoric when speaking to shareholders as it impacts relationships with their unions, governmental entities, its customers and so on. Boeing’s slow motion cut to the 777 program is a case in point, as the company seems to be desperate for orders and not willing to manage supply with demand. In actuality, BA has cunningly used the threat of production cut and impact to its employees to help push the government to finalize the Iran order in a timely manner. While we model the 777 on a worst case basis, we think it’s likely BA can keep rate at 7/month throughout 2017 (which would be a hike to street 2017 numbers) and manage delivered rate from a currently expected 5.5 in 2018 to 4-4.5 (above the worst case 3.5 most sell side analysts assume).
- Finally, the bears model much worse FCF/share estimates due to a misunderstanding of how advanced payments work. Bears also assume management has significant excess costs on the 777X program without crediting them for tailwinds on other key programs.
o BA will face the bulk of the advance payment cash headwind in 2017 as a result of lowered 777 deliveries, so we believe that by the end of ’17, this issue will be moot.
o The 777X program, while unknown, is unlikely to generate significant upfront cash outs aside from the actual physical inventory and minor upfront losses as BA climbs the learning curve in incorporating a composite wing. At the same time, BA will get a tailwind from inventory on both the 737MAX and 787 program that the bears do not incorporate.
In a sluggish global environment, air traffic grew a whopping 7.0% in September and 5.9% YTD, as air traffic continues to exceed GDP growth primarily due to increased affordability (including more middle class in APAC, more Low Cost Carriers like Ryanair aggressively expanding capacity, etc.). In the last recession during the global financial crisis, air traffic was down just 5.5% using the peak to trough on a seasonally adjusted basis; compared to other cyclical industries, that is simply a blip. While the airline industry itself is brutally competitive, BA and Airbus as well as its consolidated supply base, are the key beneficiaries of this long-term secular growth.
IATA publishes monthly air traffic statistics at the following link
The positive outlook for Aerospace is further highlighted by a slew of M&A transactions including Rockwell Collins purchase of B/E Aerospace (despite its heavy exposure to the widebody market), Berkshire Hathaway’s purchase of Precision Castparts, the take-outs of CIT’s aircraft leasing business and Avolon, Solvay’s purchase of CYT (maker of carbon fiber), Alcoa’s purchase of RTI (Titanium), UTX/GR and numerous smaller acquisitions best highlighted by the successful roll up of parts suppliers by Transdigm.
Boeing Investment Case
While Boeing is a long-term growth investment on the long-term secular drivers of Aerospace, it is currently a value stock at just ~11x 2017 FCF on the low end case with no net debt.
Boeing is a relatively simple business delivering just 750 units in its Commercial Aerospace division across 3 main models, the 737, 777 and 787, which comprise 96% of Commercial manufacturing revenues. The 737 (38% of revenues) is a near 30% cash gross margin business that will have increased production in 2017 and 2018 and is undergoing an upgrade cycle with the 737MAX scheduled to be delivered in 2017. Boeing may add another stretched variant to this product to further support orders into the early and mid 2020s. The 777 (26% of revenues) is also undergoing a transformation, though larger in scale, to the 777X. Bridging from the 777 to the 777x will require a significant decline in deliveries with an upturn expected with the launch of the 777X in 2019-2020. The 777X has already secured 4.5 years of backlog at our expected 6 per month normalized delivery rate. The 777 is currently mid-20s cash gross margin business, which will suffer from negative operating leverage as rate comes down. The 787 (32% of revenues) will produce a 4.1% cash gross margin in 2016. The 787 surprised the market by producing a 6% cash gross margin in the third quarter. By 2018, 787 will produce a 17% cash gross margin.
The 787 therefore is the biggest driver of FCF with a 13% cash gross margin improvement expected from 2016 to 2018. On $20bn of revenues, that’s $2.6bn of incremental FCF not including impact from higher ASP. This is driven by a few key factors. 3Q was already at 6% cash gross margin, so that bridges 2 of the 13 points. 3Q had 9 787-8 deliveries that were all low cash gross margin. As the -9s (price 20% higher than -8) and -10s (priced 40% higher than -8s) enter production lines and the -8s decline, BA will benefit from significant mix improvement with minimal added cost with -9 and -10 having very high commonality with the -8. BA itself has publicly stated that 70% of the way to normalized cash margins on the 787 is mix and price. Price/mix will add 7.1% to cash margins from 3Q2016 to 2018. The incremental 390bps of improvement will come from standard aerospace learning curve improvements and supplier step downs. In our diligence, we have uncovered numerous pricing arrangements were BA’s procurement prices drop as its own suppliers go up their own learning curves. Often these occur on 100-unit block changes (we just entered unit 500 in 3Q), or they can simply be driven by time (i.e., on Jan 1 of every year, price drops 2% for example). BA is currently in negotiations with Spirit Aerosystems (SPR), one of its large suppliers on the pricing of the 787 fuselage and cockpit and the question is the magnitude of the decline, not whether SPR will be able to push through an increase.
We have mostly kept our discussion to Commerical Aerospace. Defense, Space & Security will be relatively stable at slightly north of $3bn of EBIT per year.
Below is a summary output of the key drivers of FCF/share for the next several years. The key assumptions here are 737 rate of 52/month (vs. 57 planned), 777 rate of 4, 787 rate of 12 (with an annual rate of 25 on 787-10), and 787 cash gross margin of 18.6%.
Free Cash Flow Per Share YoY Bridge
2014 2015 2016E 2017E 2018E 2019E
Beginning FCF per Share $7.90 $8.98 $9.93 $11.32 $13.04 $15.31
737 0.77 0.25 (0.13) 0.54 1.31 0.87
777 0.11 0.04 (0.34) (0.89) (1.84) 0.03
787 0.63 1.67 2.77 1.93 1.54 0.73
Working Capital (1.50) (0.22) (3.32) (1.13) 1.44 0.61
Capex (0.18) (0.29) (0.50) 0.31 0.33 -
Share Repurchases 0.34 0.54 0.83 0.78 0.61 0.73
Other 0.90 (1.02) 2.08 0.17 (1.11) 0.21
Ending FCF per Share $8.98 $9.93 $11.32 $13.04 $15.31 $18.49
YoY Growth 13.6% 10.7% 13.9% 15.2% 17.5% 20.7%
To address the numerous bears on Boeing, we look at a highly unlikely bear case scenario in 2019. If we assume a monthly rate of just 42 737s (this would compare to BA’s plan of 57 and a backlog of 4,300), 3 777s (despite a backlog of over 300 777X orders to date and a 2017 rate of 7/month), and 10 787s (vs. a plan of 12-14 and despite a backlog of 715 currently). If all those decreases happened at the same time (which would be highly unlikely), then BA will face a significant one-time WC headwind of $4.72/share. Adjusted for that one-time headwind, FCF/Share, would be $11.09/share in 2019.
Free Cash Flow Per Share YoY Bridge
2014 2015 2016E 2017E 2018E 2019E
Beginning FCF per Share $7.90 $8.98 $9.93 $11.32 $13.04 $15.31
737 0.77 0.25 (0.13) 0.54 1.31 (2.57)
777 0.11 0.04 (0.34) (0.89) (1.84) (0.73)
787 0.63 1.67 2.77 1.93 1.54 (1.01)
Working Capital (1.50) (0.22) (3.32) (1.13) 1.44 (4.72)
Capex (0.18) (0.29) (0.50) 0.31 0.33 -
Share Repurchases 0.34 0.54 0.83 0.78 0.61 0.30
Other 0.90 (1.02) 2.08 0.17 (1.11) (0.22)
Ending FCF per Share $8.98 $9.93 $11.32 $13.04 $15.31 $6.37
YoY Growth 13.6% 10.7% 13.9% 15.2% 17.5% -58.4%
With the 787 performance now exceeding expectations, the path for BA’s FCF/share to continue to improve through the end of the decade is apparent. At just 9.3x 2018 FCF and 7.7x 2019 FCF, there exists significant long-term upside in BA. Near term, there is total return of 33.3% to YE16 based on 12x 2018 FCF and a $5 dividend. Downside is protected by strong FCF, a sustainable and growing dividend, (modeling in $5.23 in 2017 or a 3.7% yield and $6 in 2018 (4.2% yield), a fortress balance sheet, an extended backlog, the resiliency of air traffic as shown in the GFC, and significant capital returns (estimate BA will return over 30% of its market cap via dividends and share buyback over the next 3 years).
Significant global recession; Declines in air traffic from terrorism or oil price shock; Longer-term growth rate hit by viable Chinese competitor; Program risks on the 777X or a launch of a new 757.
There are strong catalysts that will highlight the value in the near term. Dividend increase in December, 4Q results demonstrating further 787 cash improvement, and 2017 guidance. Given where sentiment is around aerospace and the “cycle”, orders will be viewed positively, particularly an executed Iran order would fill the 2017 production line for the 777 and give some further visibility to 2018.
|Subject||Your idea is not as novel as you think...|
|Entry||11/09/2016 09:55 AM|
"Another example is BA hasn’t been written up on VIC since 2004 and that write up had no messages."
Below is the link to Novana's excellent write up from July 2015 which has 18 follow up messages
|Subject||Re: Your idea is not as novel as you think...|
|Entry||11/10/2016 07:27 AM|
Avahaz, good point that the idea has been written up a year and a half ago with a similar thesis. I had searched for ticker BA, not BA US, my miskate. Neverheless, the stock and sector has had significant negative sentiment and short interest remains very high for a large cap company at 23mm shares and now 5 days to cover. Also note the stock has been flat since that write-up despite a significant decline in market cap and an increase in FCF, making the idea much more compelling today than it was then. Finally, the write by Novana, while solid, underestimates the impact of the 777 with a $10mm contribution margin and therefore partially explains the underperformance since that write-up. At a rate of 8.3/month, the 777 has low 20s cash gross margins and ~$160mm price tag, so the contribution margin per plane is in fact $37mm. This point is noteworthy, because the numbers in the write up use a significant collapse in the cash profitability of the 777 from producing $3.6bn in cash gross margin in 2016 to $1.2bn in 2018 as a result of the production declines. Even with this headwind (and a nod to the bears who got that right from July 2015 to now), we see cash flow per share growing to $15.30 in 2018.
|Subject||Re: the current financials|
|Entry||11/10/2016 07:47 AM|
Let's use 3Q16 as an example. We estimate BA is carrying the 787 at a 3% reported PNL margin not 0. If you look back at 3Q13, BA had a significant beat as they increased margins on the program. They also slight increased in booked margins as a result of an R&D cost classification in 2Q16. So our starting point is 3%. Deferred production declined by about $150mm and with average price of $137mm and 36 deliveries, we get to another 3%, thereby solving to a 6% cash gross margin in 3Q.
First, i'm not giving full credit to BA's program accounting assumptions and what that means for FCF. Honestly, I think it'll be very difficult for BA to bring deferred balance from $27.5bn to 0 with 778 units left in the block (which would mean the $35mm cash flow on top of the 3% reported PNL margin for a total average gross margin of 26% (assuming average price of about $155mm remaining for the block). The way BA's accounting work is as they go into the block, up the curve on number of deliveries and receive more orders, they will extend the block (the last time they did this was in 3Q13, which led them to increase margins). An easy way for BA to manage the accounting would be to not raise the PNL margin as much as one would think, which would then reduce the needed cash gross margin to make the accounting work on the deferred. That is our assumption in order to be conservative. So here I discuss an 17% cash gross margin vs. the 26%. Bears get too caught up on this; if BA can get to 26% that's great, you just don't need it though to have a compelling view on the stock. If BA can execute on cost, increase rate to 14/month, then the 26% is indeed acheivable; we do see the program settling into the low 20s at a rate of 12/month.
So if our initial bogey is an 17% cash gross margin in 2018 and we are starting at 6% in 3Q16, the bridge of 11 points is pretty straightforward. We see average price moving from $137mm/plane to $151mm/plane, that's $15mm more a plane with very minimal added cost (i.e., BA has repeatedly said it doesn't cost much more to build a -9 vs. -8). We use a 75% incremental margin on price/mix. So that's, $11mm a plane or 7.2 points of margin, so we're at 13.2%. The remaining sub 400bps comes from learning curve (we still only got to unit 500 in a program that will likely be in the 2500-3000 range), efficiencies at running production line at 12/month (3Q was the first full quarter at this rate) and supplier step downs. I think $6mm a plane is a reasonable cost takeout number from 3Q16 to 2018 given that combination.
Thanks for your question.
|Subject||Re: Re: Re: the current financials|
|Entry||11/14/2016 10:18 AM|
thanks for the follow up.
yes, you are correct on understanding the 787 numbers on a per unit basis and correct on the bridge I am not giving them the benefit of lapping through potentially heavily discounted -8s.
overall i am being conservative on my numbers and as you correctly state, there is a large gap between where I am and where accountants/auditors/mgmt are. Those insiders all have the benefit of looking into the full backlog specifics in terms of pricing and mix bnenefit. They also have the benefit of understanding the cost profile (supplier contracts and assembly efficiencies) that I don't have. They also know exaclty what the price penalties on the 787-8 deliveries are and how much that impacted them in the 3Q16 for example. Those are all the key areas of where i am being conservative relative to management. My conversations with suppliers indicate the cost potential there is significant. BA has embedded price increases to their customers while they have embedded price decreases on supply contracts as they flex their OEM muscle.
Why am i being conservative? the bridge is huge as the bears correctly note. Also, i have the experience in owning the stock in 2013 where I had expected a huge "gaap earnings" beat on the 787 booked profits. While the company beat the quarter, they should have beaten the quarter by more as a result of extending the 787 block by 200 units. In a way, they just threw some of the deferred production accounting under the rug (i.e, they should've theoretically brough booked margins to 5=6% instead of low single digits; the delta is allowing for more units to amortize the deferred). I fully expect BA to do this again to help with the bridge. Eventually BA will get deferred to 0, but my guesstimate is it will take longer than the current 1300 block. If I am wrong there is more upside. In any situation, there is huge upside and more upside if i am being too conservative
On the tooling, same reason I don't give them the cash benefit there on the unwind. I am buidling my model on cash basis using assumptions for price, mix and cost. The accounting doesn't drive my numbers, but as I said I still see a path of the accounting being either or manageable as a result of block extensions.
Finally, no write up is now fully complete without some thoughts on the election, so let me just to use post to quickly address that. I have no idea if the new government will or will not label China a currency manipulator (seems unlikely given recent commentary). If that does happen, you'd have to imagine a response by China. This will not affect the current backlog but could affect future orders for BA as the Chinese airlines are a significant source of incremental demand. That's a clear risk, but again there is signfiicant margin of safety given current valuation, cash flow from delivering current backlog as well as its defense business. It's interesting to note that LMT and NOC both trade at 16x EBIT. If one were to give that muliple to BA's defense business, then BA's defense business is worth $50bn of the current $87bn market cap; this is the clear mitigant to the trade risk. When including the FCF generation over the next 4 years on backlog execution, hard to find real fundamental downside to BA on both a trough FCF analysis and a SoP analysis.
|Entry||12/12/2016 06:28 PM|
BA just announced a cut on the 777 production, which will likely be the last meaningful production cut BA will experience this cycle (BA guided for 777 monthly rate to come down to 5 a month starting in August and the market will likely look at 3.5/month in 2018 as the 777x transition begins). In conjunction with that cut, BA beat street estimates on the dividend increase of 30% to $5.68/share in 2017. With over $13 of FCF/share in 2017, that dividend is very well covered. BA typically doesn’t trade north of 3.5% outside of recessions and even then for short periods of time. At 3.5%, the new downside could be $162, higher than where it is currently trading today. Moreover, I see the dividend growing to nearly $7/share in 2018 which provides further support as time passes.
BA is also well positioned for tax reform. BA would achieve over $17 of FCF in 2018 if the corporate rates are lowered. BA may also further benefit from export tax credits, and with no net debt, BA will not be affected by a potential elimination of interest deduction.
With a historically normalized multiple in the mid-teens, one can make a bull case valuation significantly higher than the targets I have in the write up (i.e., $15 2018 FCF * 14 would be $210. I also have FCF growing in 2019 to over $18/share and beyond as the company leverages long-term growth in air traffic. Continue to see the stock as an exceptional risk/reward, now further supported by an even larger dividend yield.
On the 787 potential, the board now is now yet another agent (in addition to management and auditors) with confidence in that program being a cash cow. The board also has access to the private level data on 787 pricing and costs. The board's dividend increase is certainly an endorsement to management's commentary that in any realistic scenario on production, they see FCF growing year over year over the next several years.
|Entry||06/20/2017 10:53 AM|
With Boeing stock hitting $200, a series of headlines out of the Paris airshow, a sell-side note discussing a $350 blue-sky scenario, now is a good time for a quick update. In summary, I would continue to hold/buy more on any dips and see the current valuation at 13.7x 2017 FCF, 12.5x 2018 FCF and 10.5x 2019 FCF as a compelling risk/reward.
With the new stretch 737-10 achieving strong orders, the news out of the Paris airshow is indicative of how important product cycles are to the overall book/bill that had historically been a leading indicator for cycle and stock performance. As discussed before, 2013 industry book to bill had an unusual spike that pulled forward order demand due to the launches of the high volume A320Neo and 737Max. While the bears focused on the subsequent declining book to bill, I continue to see very healthy air traffic growth, high load factors, strong global airline profitability, continued penetration of low cost airlines globally (key driver of traffic growth > GDP) and extended order backlogs. For example, Global passenger air traffic growth YTD (through end of April) of 7.9% has outpaced supply growth of 5.9%.
Overall sentiment around “the cycle” is improving. Airbus, for example, commented that 2017 will be a very slow year for orders and its stock is nevertheless at all-time highs and up 22% YTD. Book/bill is at or close to a trough while the outlook for air traffic remains strong particularly with the improvement in EM economies. BA still trades closer to a trough multiple on FCF vs. a normalized multiple (typically in the mid teens). With no net debt, BA operates in a rational duopoly with long term secular growth, generates a 30% ROI, and has significant margin expansion potential with its own suppliers and other global industrial champion peers generating margins 50-100% higher.
BA appears to be headed for a new aircraft targeting the middle market (i.e., the 757 replacement) due to be launched in 2024/2025. While this new product is not unexpected, I view the product launch as both an opportunity and concern. The opportunity is to increase overall industry traffic growth. This plane will open yet further city pairs (for example, DC to Prague) that would otherwise go underserved. Affordable air traffic between city pairs increases the demand for air traffic driving overall industry volumes (as Ryanair has shown quite well). There is clear replacement market for this aircraft (i.e., the 757/767 retirements) and while I had hoped for BA to keep to just 3 simplified models, it would make sense to add this fourth model in 8 years from now as industry demand will be significantly higher. My concern with the 757 is with any new program: added risk in terms of cost to develop and potential cannibalization of existing programs. That concern is mitigated by BA’s learning in the 787 which was the first plane to use carbon fiber in its fuselage. BA has used that learning to add a carbon fiber wing to the 777x for example and that program launch is going smoothly.
Recapping the key 3 commerical programs, the 737 is very healthy with extended backlog, mix improvement, and well-supported production ramp increases over the next couple of years. With today’s United order for 4 777s, BA is now 95% filled on the bridge to the 777x. The production rate for the 777 has now clearly troughed at 3.5/month (in 2018 and 2019) down from 8.3/month with the upturn expected in 2020. Finally, the 787 is very well supported at 12/month. I don’t expect BA to increase production beyond this rate due to competitive supply from the Airbus A330NEO. Finally, given the significant improvement in both domestic and international defense spending, I now expect BA’s defense business to grow slightly vs. prior concerns of flat to negative growth.
The key variable in cash flow per share is the 787. I expect this variable to have another positive inflection in 2Q17 as BA benefits from step function down supplier cost reductions as they have moved into the 500 unit block. My research of the supply chain indicates numerous trigger points for price downs with the advancement into every next 100 unit block one of the critical components. BA will further benefit in 2018 with the mix improvement associated with the 787-10.
BA has guided for $14 a share in FCF in ’17; I expect that guidance to be beat and expect $14.50 a share. The decline in the 777 production rate impacts FCF/share growth in ’18, but is more than offset by the 787 cash improvement and 737 rate increase and expect FCF/share at $16 in ‘18 with potential upside. With production rate increase on 737 and cash improvement on 787, BA can generate $19/FCF in ’19 despite inventory build on the 777x. I expect FCF to continue to grow in 2020 and beyond (as BA is a secular growth business). With valuation at just 12.5x 2018 FCF and 10.5x 2019 FCF, improving fundamentals, improving company profitability with 787 cash improvement hitting critical inflection points, I continue to see BA as a compelling risk/reward. While the RSI is at 79 and pullbacks have often occurred post the Paris air show, I believe its strong relative stock performance is more likely indicative of future strength and would add on short term pullbacks.
|Subject||Re: BA vs. Airbus?|
|Entry||06/20/2017 02:50 PM|
I evaluate the entire ecosystem and continue to think BA is the best way to invest in the Aerospace theme.
BA is markedly cheaper on 2019 FCF (roughly 10.5x vs. 15x)
BA is derisked while Airbus is essentially BA 3 years ago. BA is well on its way down the learning curve on the 787 and Airbus just started on the A350.
BA has taken its pain on the 747 while Airbus will eventually have to take more pain on the A380.
BA has stronger near term FCF and when combined with strong capital allocation using the buyback math, BA remains cheaper on 2020, 2021 and beyond FCF/share.
While Airbus has a gap in margins today with BA, I expect that gap to persist with BA's margins tracking higher. In turn, BA's ROIC is higher and its ability to generate and distribute cash flow is struturally greater.
While FX represents an opportunity for Airbus in the near term, utlimately the business is mismatched (has significant costs in EUR and revenues in USD; that mismatch creates volatility and adds risk; BA has costs and revenues in USD; less risk; less volatiliy; higher multiple).
BA is underappreciated by the investment community (190 average target price vs. stock price of 200 whereas Airbus has a much higher percentage of buy ratings and 80 target price vs. stock price of 76).
Ultimately, the upside over the long-term is relatively similar, but you are rrelatively derisked in the case of BA, while Airbus is still at high risk point in terms of execution.
Hope that helps.
|Subject||Update post 2Q|
|Entry||07/27/2017 08:46 AM|
With the stock up over $90 since this post, figure now is a good time for an update. I continue to see significant upside to BA. Stock is valued at just 13.5x 2018 FCF and sub 12x 2019 FCF for a company with long-term secular growth > GDP, now minimal net debt, 30% and growing ROIC, huge barriers to entry and production near trough levels (777 has been gutted from 8.3/month to just 3.5/month with 737 growing and 787 highly unlikely to be cut from the 12/month rate).
What happpened in yesterday's print? Simply, BA proved that its accounting is more likely inline with reality in that they will claw back $27bn in FCF over the remaining 787 units in the block. Specifically, deferred production was down $531mm. On top of the booked GAAP profit we estimate of about 3%, this would imply each 787 is making roughly $20mm/plane (last Q we estimate this metric at $14mm/plane). Note that this mix included 8 787-8s in the quarter. When BA transitions to the 787-10s we see significant further upside due to much improved mix. I believe the jump in profitability were caused by 2 things: 1) price penalites on 787-8s are likely now eliminated as we are getting past the units that were heavily delayed and 2) supplier stepdowns as BA entered in the 500 unit block.
See the prior messages where my initial conservative estimates on 787 profitability per plane by 2018 undercut BA's accounting. Now it appears that BA's board, mgmt team, accounting firm were indeed right in their analysis of the 787 future cash flows. We estimate FCF/share of about $19-20/share in 2019; with stock at $234, remains a highly compelling risk/reward, though we acknowledge much of the "alpha" move is now in rearview mirror and BA is simply now a cheap compounder. Finally, I expect another significant dividend increase in 4Q17 to reflect these sustainable cash flow levels.
Natey1015, apologies, i missed your Q from last month, I exclude the net cash and i account for pension via cash contributions. As we now see in Airbus results this morning with significant issues in ramp ups of 3 of 4 different programs, Airbus is still highly risked. Also, Airbus profitability wavers in the wind with the EUR FX, which has quickly gone the wrong way. Airbus is inherently riskier at this point in time and structurally riskier as a result of massive FX mismatch, which equals lower multiple. I still estimate about the same long-term reward in owning both, but Airbus carries just a lot more risk, while BA is buffetted by massive cash flow. Still prefer BA here.
|Entry||02/14/2018 05:30 PM|
While the market argues about $23 vs. $30 in 2020 (it'll be higher), BA is well-positioned to generate nearly $50 of FCF/share in 2023 and perhaps earlier. The company has executed incredibly well on supplier cost reductions, 787 improvement (company was burning $1mm per plane in 1Q16 and by 4Q17 is making $24mm a plane), feathering in 737 MAX, ramping rate on 737 and moderating cash decremental margins on 777.
Wiht that execution, company has guided to about $22/share in 2018 FCF despite 777 trough production (3.5 delivered rate per month vs. prior peak of 8.3 per month) on 737 production of ~50 units per month with a very high likelihood they'll take that to 70/month and 787 at 12 month with bad mix (-8s and just first year of -10). In a sense, 2018 is the trough year for FCF as all major models have upside. 737 cash gross margins are north of 30% vs. commercial aero ebit margins of 11%, so with improvement in 787 block accounting and 737 rate increases, it's clear that BA is much more close to hitting mid-teens commercial aerospace margins by 2020 than the market is giving them credit for.
Layer in Services growth over 5 years with margins in mid-teens, defense for BA actually now growing vs. previous expectations of flat performance, buybacks, just not hard to get to $50 in 2023. FCF has a decent degree of negative working capital as BA benefits from production ramp. Either way, at 15x $50 or 18x clean EPS of $42 (adjusted for 787 accounting), stock can return 130%+ including dividends for 5-year IRR of 18%.
Near term, see $32+ of FCF/share in 2020 and approximately $27+ of clean EPS. At 18x, stock worth $486 or 45% total return including dividends over 2 years. With $22 of 2018 guided FCF (BA is conservative with their guidance) and $32 of 2020 FCF, minimal downside here, setting up a good risk/reward.