Update: 24/7 Wall Street just published this gloomy outlook about Boeing.
Buckingham Research Group today lowered its call on The Boeing Co. from Neutral to Underperform, the equivalent of Hold to Sell. As far as we can tell, this is the first research analyst to put a sell on Boeing in recent years.
According to Thompson/First Call, 10 analysts rate Boeing as a Strong Buy, nine as a Buy and seven as a Hold. None rated Boeing as an Underperform or a Sell (Thompson separates the two ratings; Buckingham’s Underperform is a Sell). According to Thompson/First Call tallies on Yahoo Finance, there hasn’t been a downgrade to sell since 2008, when the 787 program problems were ramping up.
Buckingham has become increasingly pessimistic in recent months about Boeing, so the new rating isn’t necessarily a surprise, and Buckingham isn’t alone. Bank of America Merrill Lynch recently downgraded Boeing to Neutral and in June RBC Capital Markets downgraded Boeing to Sector Perform from Outperform. Wells Fargo and Credit Suisse analysts have been raising concerns in recent notes but haven’t downgraded Boeing, and UBS has been bearish for some time.
Buckingham cited anticipated worsening free cash flow as its principal reason for the downgrade, driven by BRG’s forecast of lower 777 production rates and higher than Boeing’s forecasted $25bn in deferred production costs for the 787. BRG also cited about 1,500 737s not yet added to the accounting block it believes have been sold at steeper discounts than historically.
UBS and Wells Fargo have also expressed concerns over Boeing’s ability to bridge the 777 production gap between the Classic and the 777X. Credit Suisse has been sounding increasingly bearish in its recent research notes.
BRG predicts Boeing will announce next year it will lower 777 production rates, initially to seven and ultimately perhaps as low as four. Although Boeing officials claim that sales campaigns, new firm orders, existing options and Letters of Intent will be sufficient to garner more than 300 sales between now and 2020, when the 777x begins delivering airplanes, the assumptions rely on 100% conversion of options and LOIs to support new sales. Buckingham concludes this is highly unlikely.
“We estimate there are ~705 delivery slots for the 777 Classic to be filled between
4Q14 and when the 777X reaches maximum production in 2022. About ~275 slots will be filled by the unfilled orders already in backlog leaving an additional 431 firm
orders needed for the 777 Classic to maintain 777 production at a stable 8.3/mo
through the introduction of the 777X,” Buckingham writes.
This amounts to 72 new orders and conversions per year, significantly higher than the 40-50 per year Boeing says it needs (although one public reference used 40-60 per year). Some of these orders will no doubt come from the Options and Letters of Intent already on the books.
“[Boeing] has 201 options and LOIs (Letters of Intent) for the 777 Classic. Based on the
historical conversion rates into firm orders, we estimate 72 options and LOIs will be converted to firm orders leaving 359 open delivery positions to be filled to sustain production at a stable 8.3/mo. The additional 359 orders will come from (1) replacement demand and (2) capacity growth demand,” BRG writes.
BRG doesn’t think Boeing will obtain 359 orders, or 60 per year through 2020. The current fleets and orders are concentrated with carriers that already have young 777 fleets, Buckingham writes, limiting demand.
“Our data indicates that ~68% of widebody seats are located within the largest 24
airline fleets. [T]here are 9 airlines that hold 38.3% of widebody seats in the total active fleet and 15 airlines that hold 29.5% of widebody seats in the total active fleet. The remaining ~32% of widebody seats are located in 145 additional airline fleets,” BRG writes.
“Our analysis points to a shortfall of 261 orders for the 777 Classic that is necessary
to bridge the production gap with the 777X in 2014-2019.”
British Airways, one airline that we know Boeing had proposed acquiring more 777-300ERs, said it’s not interested.
The continuing poor cargo market is still depressing demand for new-build freighters, including the 777F.
BRG also thinks Boeing will soon announce a termination of the 747-8 program, which ironically it views as a positive because the poor-selling airplane is a drag on cash, but resulting in a $1.7bn non-cash charge when it happens.
Buckingham thinks the launch of the Airbus A330neo will put pricing pressure on the 787.
Buckingham actually raises earnings estimates for 2015 from $8 to $8.41, somewhat below consensus of $8.46 per share, but lowers earnings for 2016 and beyond.