Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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Boeing remains confident it will fill 777 production gap; cash flow to remain strong
Dec. 3, 2014: Boeing remains “confident” it will be able to bridge the 777 Classic production line at current rates to the introduction of the 777X in 2020, including some “feathering” of the two airplanes.
Boeing president and COO Dennis Muilenburg also said cash generation and free cash flow will remain strong even as Boeing invests in research and development, hikes stock dividends and buys back shares to boost shareholder value.
Muilenburg made the remarks today in a wide-ranging question-and-answer format during the annual Credit Suisse Global Industrials Conference in New York.
Muilenburg said that Boeing is improving results with lean manufacturing, capturing quality upfront, its controversial Partnering for Success cost-cutting program with suppliers and increasing production rates on the 737 and 787 lines.
“We’re playing into a very strong commercial marketplace, a record marketplace, right now,” he said.
The 787 program remains a challenge with more than $25bn in deferred production costs, but Muilenburg said this will “roughly” be the peak. The 787-9 is more profitable than the -8 and next year will be about equal to the -8 in deliveries. Production, over the last two years, has gone from a “cold start” to a “stabilized production system” at 10 787s per month. “Every airplane is coming down in unit costs. The 787 program will go cash flow positive in 2015,” he said.
Free cash flow, a key financial metric that aerospace analysts follow closely, is current at $5-$6 per share, noted Credit Suisse’ analyst, Robert Spingarn. The target from analysts is in the mid-teens, he said.
“Getting here could take five or six years.” Muilenburg agreed.
“We’re going to do this in a way that makes good business sense, executed in a steady way. It will be executed in years. There are some cash headwinds, [for which] we’ve been very transparent. Ramping down C-17 line, for example. Building C17s in 2015 but delivered in 2016, this could create some headwind.”
Free cash flow is closely tied to whether Boeing will be able to successfully bridge the production gap for the 777 Classic. Muilenburg is confident Boeing can. There are 300 in firm backlog today, 150 in options that customers can exercise and so far this year 57 orders have been placed.
“We’re very confident we’ll be able to fill that bridge. We’re filling slots in 2017 and 2018 now. The 300ER is unique in the market right now. The installed base is 1,200 aircraft 40% are more than 10 years old.”
Muilenburg downplayed the contribution the 777F might make to building this bridge.
‘The freighter market is an important parameter but not dominating. It will be helpful but we’re not counting on it,” he said.
When you have to buy your own shares back instead of investing in new product you are in deep trouble!
And as noted by Uresh Sheth, 787s are piling up on the ramp and not getting delivered.
Seems more like the way the Russian factories used to (still?) work, try to get it all done at the end of the year to meet the production quota.
Makes you wonder if all those trembling workers are not exacting their toll?
I never get the idea of buying your own shares back. I know it’s for the shareholders/ per-share value. Pay a solid divident yes, but buying Shares back instead of investing as a tech company is ridiculious. Deutsche Bank did this also for some time, later they made one capital stock increase after another.
I’m more and more troubled on the direction Boing is heading and hope this will change soon.
Maybe someone can tell me where I am wrong here, but stock buy-backs seem to decrease the amount of dividend that needs to be paid, and also reduce the dependence on investors (you have less stock to “answer to”). I am no expert, so sure there is a flaw in my thinking.
So why did we put out the stock in the first place?
I am sure there is a logical explanation (grin) and I am sure it does not serve the companies long term interest but does jack up certain managers bonuses.
Paying some of the 787 deferred costs /dept would be responsible management, but..
McNerney & the board get more money if they use Boeing money to buy its own shares. The salary of the Boeing board and those reporting to them are mostly dependent on stock value.
http://www.usatoday.com/story/money/business/2014/03/14/compensation-for-boeing-ceo-soars/6425487/
The stock holders obviously won’t block it. Win-win for board & stockholders. Cashing. Long term company interest are somewhere down the prioritylist.
stock buybacks are a backdoor way of paying dividends to shareholders.
instead of paying them cash per share in the form of a dividend, you (in theory) drive up the stock price because now earnings are distributed across a smaller number of shares.
there are favorable tax implications for the company and the shareholder by doing it this way.
Wall Street loves this because it is equivalent to winning a hand of blackjack in the casino. the gambler gets paid, which encourages him to gamble more.
for a high tech (or any growing company) this is actually destructive to the long term prospects because it reduces free cash available for investment in new technology, expansion or acquisition of other companies. these activities must now either be avoided, scaled back or paid for with borrowed money (which again, Wall Street likes because the company is risking less of its own capital, and the banks get guaranteed profits)
remember, Wall Street’s idea of the perfect company is a middleman who has no employees, no assets, takes no risk and produces not product while skimming a vig off of somebody else’s business transactions in exchange for little to no added value while still being absolutely mandatory to the legal delivery of the final product (which should be indispensable).
A fine example of this is the “licensed beverage distributors” in Massachussets. They never actually even see the product they “distribute” as it is all direct delivered from the manufacturer to the liquor store. their only asset is a license that they bribed a state official for 50 years ago. their only product is paperwork (mostly produced by automated systems) and egregious quantities of cash and it is illegal to sell alcohol in Mass that hasn’t been “distributed” by one of them.
For those who are unfamiliar with stock buybacks…
http://www.investopedia.com/articles/02/041702.asp
great article, which boils down to: makes the company metrics look better on paper, driving up share price (which helps the shareholders and senior manager bonuses) but does nothing to help the fundamentals of a company as a functional business. classic MBA management.
the line about “there is no better investment than ourselves” as justification is ludicrous. investing in yourself doesn’t mean stock buybacks, it means investing in R&D, manufacturing technology and advancing the competitiveness of your products in the marketplace, not enriching your shareholders and VPs.
sorry, I am just completing my MBA and I am thoroughly disgusted with the way public companies in america consider short term stock ROI metrics to be the be all and end all of running a good business at the expense of building actual long term value.
Buying back stock is a good thing. Companies indicate to the market two things through buy backs 1) the company has enough free cash flow that can be used to purchase stock 2) the number of shares available on the market are reduced and the company’s value can hold the shares until there is need to generate cash through sales of stock.
That is the theory.
In reality Boeing tries to wag the dog.
They’ve stuffed a bombastic amount of money into bottomless boxes labeled “Deferred prod. Cost” and “Inventory”.
You’ll never see any of this back.
This planned Topping will be “sinking money into cosmetics”.