Feb. 16, 2016, © Leeham Co.: Boeing has been under pressure since its Jan. 27 earnings call, when its 2016 guidance fell short of analyst expectations. Then the news that the company is under preliminary investigation by the US Securities and Exchange Commission over how its program accounting assumptions were reached.
Free cash flow (FCF), shareholder buybacks and strategy all have come under scrutiny is recent years. But just how different is this compared with its bitter rival, Airbus?
It turns out that other than Boeing’s use of program accounting and Airbus’ use of unit accounting (except for the first several A350 deliveries, for which contract (program) accounting is used), the approaches toward cash flow and shareholder buybacks are very similar.
Credit Suisse’s European analysts who follow Airbus issued a long research note on Feb. 5, just days before the Bloomberg News report on the SEC investigation. The Feb. 5 note doesn’t address program or contract accounting. But as does Credit Suisse’s US analyst who follows Boeing, the Airbus note discusses FCF and stock buybacks at great length.
Credit Suisse USA is bullish on Boeing’s FCF guidance and with its own analysis. This is the principal driver for CS-USA’s stock rating, currently Neutral, though it recently raised its price target. Seven analysts currently rate the stock Hold (Neutral), 13 are Buy, two are Overweight (basically, Buy) and two are Sell. Most focus on Boeing’s FCF, although there are, of course, other factors.
CS-London rates Airbus Outperform (Buy). Thirteen analysts rate Airbus Buy, seven Outperform, eight Hold, one Underperform and two Sell. We rarely see Airbus research notes so we are unable to give an overview of the driving factor. Since we do have CS-USA and CS-London reports, we’ll use these as our comparisons between the Big Two OEMs.
Since we have written many stories about the Boeing FCF issues, we will focus on Airbus today.
Airbus, writes CS-London, “is a free cash flow story.”
“Airbus should generate EUR24bn of cumulative FCF over 2016-20E, vs EUR19bn for 2000-15,” writes CS-London. “This should be driven by the increase in A320 output, a reduced cash drain from A350 and A400M and the Iranian order….”
CS concludes that the “large bulk” of the cash flow will come beginning in 2018. This is when production of the A350 is schedule to peak at 10/mo and the A320neo, with its greater selling price vs the A320ceo, will be at full production. The CEO is supposed to be phased out by then. The following year, production of the neo is planned to increase to 60/mo. The A330neo will be ramping up in 2018; the first is scheduled to be delivered in December 2017.
“Based on this FCF build-up, we expect Airbus to close 2020E with a net cash position of EUR24bn (vs EUR9bn in 2015E)…. Given the cash needs of the business (eg, investment in new programmes, a EUR8bn cash buffer), we estimate that this would allow Airbus to envisage share buybacks of up to EUR15bn…between 2017 and the end of the decade.”
CS-London also expects Airbus to increase dividends, something Boeing has also done in recent quarters.
Boeing has been accelerating pre-delivery deposits (PDPs) and negotiating much larger “advances,” or initial down payments, for orders for at least two years to meet its cash flow requirements, including its commitments to shareholders for stock buybacks and dividend hikes. Last year the figure was estimated by Wall Street analysts to be about $1.5bn, and more than $3bn the year before.
“Cash advances did not have a material impact on our operating cash flow result, which was a strong $9.4B for the year,” Boeing spokesman Chaz Bickers told LNC.
In contrast, CS-London “see[s] Airbus spending the cash it has rather than the cash it may have or the advances it receives from clients.”
A380 charge predicted
CS-London includes the expectation that Airbus will take a new charge on the A380 program next year, “to reflect price pressure that we feel may result from the lack of commercial success of the aircraft.”
This would be a non-cash charge, not affecting cash flow.