Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Bjorn’s Corner: New engine development. Part 4. Propulsive efficiency April 19, 2024
- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
- Focus on quality not slowing innovation, says GKN April 18, 2024
- Boeing defends 787, 777 against whistleblower charges April 17, 2024
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
Split view on 787 forward loss
During the 2Q09 earnings call, Boeing seemed to be laying the foundation that a forward loss might be forthcoming on the 787 program and some analysts shortly thereafter issued notes predicting there will be one. However, within the last two weeks two analysts that we know of have taken a different view. (We see reports from only six of the aerospace analysts who cover Boeing.)
Richard Safran, the former lead aerospace analyst at Goldman Sachs, now is with Buckingham Research and initiated coverage Aug. 12 with an Accumulate rating. He says this about the prospect of a forward loss:
Our analysis indicates the 787 is not in a forward loss position. That estimate assumes that BA will choose an accounting quantity sufficiently large such that total program revenues will exceed costs; we think that is 850-900 airplanes. BA has disclosed only limited information regarding 787 expenditures to date. The 787 accounts for approximately $8bn of BA’s inventory and we estimate that by first delivery, that will rise another $6.4bn (assumes $800mn per quarter in deferred production costs & tooling).
Safran’s Accumlate rating is in stark contrast to his early Sell rating while at Goldman.
Safran’s successor at Goldman, Noah Popanak, today issued a report on Spirit Aerosystems, which supplies the nose section for the 787. He wrote this:
Regarding 787, we believe the market is widely anticipating that Boeing’s next schedule will include a substantial delay, and drive a reach forward loss (costs greater than revenue) for BA and SPR. However, we see some probability the delay will be modest and neither BA nor SPR will face a reach forward loss. In the factory we saw that fuselage unit #9 was no longer there and #10 was queued up, meaning SPR is still shipping 787 sets to BA and could actually hit its target of ten units for the year.
The upbeat reports, taken with news last week from Jon Ostrower’s Flightblogger that first flight may be targeted for late November or early December, with EIS in 4Q10 (neither as yet confirmed by Boeing), has sent Boeing stock up significantly since last week.
Ironically, the stock is now trading highter that it was immediately prior to the first flight delay announced last June.
I am just curious as to how they justify these reports. How do you go from such a negati(ve outlook to such a positive one during the period in which the 5th (or was it 6th) delay was announced, under questionable circumstances, one might add!? Does this man not have to answer to anybody for his comments? I asked you this a couple of years ago after the rollout con Scott, and you replied that Boeing would probably pay for it if they did not manage to meet their next schedule. Yet after each delay which causes the stock to dip temporarily, it comes back up again. How is it that Boeing stock keeps taking off, even when doing things that would have reduced most companies worth to a penny stock? I am certain that there are many other companies out there that would love to emulate this behaviour. They can even call it Boeing Syndrome (BS).
JayPee: Day traders.
My guess is Safran isn’t at Goldman anymore because he is so consistently wrong. Say what you want about GS, but they are the smartest guys on the street. They might as well have a printing press turning out thier own cash. They don’t keep you if you are deficient in any way.
And Safran was cutting the throat of BA stock back when he had no reason at all. He was always first on board with a downgrade. If you want to make a call on Boeing, jusy follow Safran and make your call opposite his.
And he’s WRONG again this time. BIG TIME.
If Boeing announces no forward loss on 787, the next big announcment will come from the S.E.C, something about “accounting irregularities”.
That is IF the street allows them to get away with an accounting quantity in excess of five hundred units or so. Does anyone else remember the uproar when Boeing avoided a forward loss by amortizing 777 program costs from the planned 200 units to 400? I do. That was dirty accounting then, and it will be FILTHY FUNKY NASTY if they get away 850-900 this time. Thats’s just sleazy corperate gangsterism, and James Bell’s reputation would descend into the bin with the rest of the company’s leadership.
As to you BA stock watchers wondering why it’s up, that’s easy:
The whole market is overbought, BA included. It will correct within the next 2 months most likely, and get pounded a little more on a forward loss announcment and a charge against earnings. This in not just another stock symbol. It a massive corperate institution with a giant PR machine. It has every advantage when it comes to keep it’s stock price stable, regardless of the facts. It is expert in witholding material facts from investors, watering down bad news, and inflating the value of otherwise minor and relatively meaningless good news. Fund managers are buying anything right now trying not to get left out of the rally, trying to make thier numbers and keep thier jobs, after having sat on the sidelines waiting for a correction that never really happend.
Hopefully for Popanak, his bosses view his anaysis of SPR for what it is, a call on SPR, and not BA. He’s clueless so far on BA. He’d better hope he wises up when the desk requests an analyitical on BA, or he’ll have a job at a fifth tier firm in short order.
787 revenue estimates–
Discounted list revenue– 850-900 planes x $100M/plane = $85-90B revenue
Very low end est– 850-900 planes x $50M/plane = $42.5-45B revenue
The A380 cost less than $20B to develop,
The A350xwb is forecast to cost ~$15B
Say, 787 total costs are ~$20B (high end).
Using low end est.– $20B/$50M/plane = 400 planes, break even.
Too simplistic, and almost certainly totally off the mark.
Your calculation only works if each plane is delivering a US$50m contribution to earnings over production cost (which seems high), and Boeing managed to get 0% interest loans for the US$ 20 bn.
The problem for Boeing is that if they spread the cost over more frames, the cost increases (interest), unless they deliver the additional number of frames in the same time as the original number. I just did a less simple, but probably equally wrong calculation, based on a production of 200 copies a year, average contribution (earnings over cost of producing the aircraft) US$25m (two lines, no strikes, no fastener shortage), and assuming 4% interest for the 20 billion. Ignoring ramp-up period, it will take 850 copies and about 4.5 years for them to break even. Bring the interest down to 2%, and you are looking at 830 copies and still over four years.
As I said, almost certainly wrong, but seems a bit more realistic than 400 copies, and would explain the worry about the overall profitability at current order numbers better. At 4% over 4.5 years, interest adds 9% to the US$ 20 bn.
Disclaimer – I have no idea how much it costs to build an aircraft. 🙂
Considering the heavy reliance on risk-sharing suppliers in the 787 supply chain however, I would think that an assembled aircraft ready for delivery will probably cost Boeing more (proportionally) than e.g. a 737 or 777. Assuming a mid-point list price of US$165m, and an average 25% discount across the 900 or so orders, you’d look at a price of US$124m. So a contribution of US$25m on average seems a bit low.
Maybe someone could comment on the assumptions? Always eager to learn.
I may be naive, but a $2.5BN charge for “3” airframes results in each airframe being worth $833.33MM – is something else going on that gives rise to the analysis of a forward loss position?
$2.5 billion for 3 airframes?
I need that kind of accounting for my next tax return!
Seriously, does this include all delay-related costs?
Must be.