Two analysts, two very different views of Boeing free cash flow

Boeing LogoSept. 13, 2016: Two aerospace analysts took a look at Boeing’s free cash flow estimates for the next five years and came away with very different conclusions.

Cai von Ruhmor of Cowen & Co. believes the 787, 737 MAX and KC-46A programs will more than offset declines in the 777 Classic cash flow and increased spending on its successor, the 777X. Von Rohmor maintains an Outperform (Buy) rating on the stock.

David Strauss of UBS looks at the data and concludes the FCF will decline, most notably as the 777X cash outflow ramps up ahead of deliveries in 2020. Strauss has a Neutral (Hold) on the stock.

The Bull case

In a September 6 research note, Cowen believes Boeing will announce another production rate cut on the 777 Classic program by the end of this year, effective in 2019. He predicts a rate of 4-5/mo. Boeing already said the production rate will come down to 5.5/mo in 2018, ex-777X test planes and “blanks.”

(One consultant LNC spoke with believes the production rate will decline to 3/mo in 2019.)

“Boeing may announce by year end a cut to its planned 777 rate of 7 to 4-5/month and likely won’t commit to hike 787 from 12 to 14/month any time soon,” Cowen writes. “Both decisions would dampen profit accrual rates with the 777 cut also hitting cash flow. But we think these headwinds will be outweighed by 737 ramp to 57/month in 2019 and 787 cash flow build from abating price concessions for delivery delays, productivity gains, delivery mix shift to the more profitable Dash 9/10, and supplier price step downs. Combined with KC-46A cash turnaround by 2018…we see cash flow rising to $15/share by 2019.”

The “well telegraphed” rate cut for the 777 “only would tell investors what they already know,” von Ruhmor writes.

With the end of the 747 program now becoming clear, the decline in the 777 Classic and ramp up of costs for the 777X, von Ruhmor believes the a production rate increase to 57/mo for the 737, improving cash flow for the 787 as the deferred production costs burn off and cash flow finally on its way for the initial Low Rate Initial Production for 18 KC-46As will offset the “headwinds,” as Wall Street analysts call costs.

He sees free cash flow jumping from an estimate $7.675bn this year to $8.25bn in 2019.

The Bear case

In a September 12 note, UBS’ Strauss, on the other hand, predicts FCF will fall by about $1bn during the same period.

“While overall FCF in 2017-19 should benefit from 787 improvement and higher 737 rates, we think this will be more than offset by the impact of initial 777X production and lower 777 deliveries and we forecast Boeing’s total FCF declining from current levels (~$7B),” writes Strauss. “We forecast annual FCF dropping to near $6B under our 777X base case and to near $5B per year in our downside case. In our 777X upside case, we forecast annual FCF relatively flat at $7B.”

Strauss sees additional pressure on the FCF.

“In addition to the cash burn on initial 777X production, we estimate FCF will be negatively impacted by $1-2B (pretax) from lower delivery rates on 777 at 4-5/month as compared to 8.3/month in 2016,” he writes.

“Offsetting the 777 and 777X, Boeing stands to benefit from 787 improvement, which we estimate will average $1B (pretax) per year in 2017-19, and higher 737 rates along with the burn off of 737 MAX inventory that it is accumulating in 2016. We estimate the 737 benefit at $2B.”

37 Comments on “Two analysts, two very different views of Boeing free cash flow

  1. This probably isw not the best place to post this, but no-one seems to have picked up on this article from CH Aviation news which suggests an unexpected possible second hand market for MH’s A380s:

    Malaysia Airlines (MH, Kuala Lumpur Int’l) Chief Executive Officer (CEO) Peter Bellew says the carrier is in talks with unspecified carriers in China and the ASEAN bloc over the possible sale of its unwanted A380-800 fleet.

    Speaking to Bloomberg, Bellew said talks were also underway with Airbus Industrie (AIB, Toulouse Blagnac) to add ninety more seats to the 494-seater aircraft. The move, if successful, will allow the A380 to continue to operate in a two- or three-class configuration while increasing its appeal to the second-hand/charter market.

  2. It all depends on how you read the runes. The suggestion that 777x is now looking to EIS in late 2019 must be a positive sign but am guessing the burn on that program will be substantial. Has Boeing got its mojo back? There certainly seems to be an underlying confidence as opposed to senior management around the company.

    If it was more than just short-term FCF that interests the analysts it looks like Boeing are threatening to turn a corner.

  3. Ruhmor: “But we think these headwinds will be outweighed by 737 ramp to 57/month in 2019.”

    – The lack of new orders, if it were to continue for an extended period of time, may somewhat dampen Boeing’s ambition to ramp up production to 57/month. In the present context it would certainly be more prudent to keep production rates where they are. This would also be an opportunity for the suppliers to catch their breath.

    Strauss: “Boeing stands to benefit from 787 improvement, which we estimate will average $1B (pretax) per year in 2017-19.”

    – With this kind of statement this analyst is waltzing on thin ice. And obviously doing so to the tune of Boeing’s overly optimistic projections.

      • The reason I think so is because I assume it is based on a 14/month production rate, and to get there would require an increase of the existing rate, which is currently at 12/month. But this scenario requires a steady flow of new orders and this is no longer the case for the following reasons:

        1. Economic downturn.
        2. Low fuel prices.
        3. Higher asking price for 787-9/10.
        4. Cheap A330ceo/neo
        5. Lack of a medium-range variant (787-3)
        6. Market maturity in the EU and US.
        7. Widebody market’s intrinsic down cycle.

        My own two cents projections tell me that Boeing will be unable to raise the production rate and may actually have to lower it. Since unit costs are related to production rates, and since overall profits are related to unit costs, just do the math.

  4. The big question is what price a 737 or 737 MAX? 500+ per year at 10 million margin or 500 per year at 5 million margin, if you follow me. I can imagine 787 cash flow being good from 2019, after 787-10 flight testing and EIS are behind them, but planned KC-46A is only 2 per month, isn’t it? And underbid to boot. 777 we all know about. So I think it hinges on the very obscure pricing of all these MAX orders.

    Maybe the military to the rescue? I can’t see it until after 2020.

    • “I can imagine 787 cash flow being good from 2019, after 787-10 flight testing and EIS are behind them.”

      That would only be possible if production rates could be maintained above 10/month or so. It is currently at 12 and Boeing wants to bring it up to 14. I think this is highly optimistic. For a lack of new orders may force Boeing to lower it’s expectations. We have to keep in mind that the 787 business case rests on high production rates. And like if lower demand was not enough the few potential customers that are left have two 787 alternatives to choose from: the A350-900 or the A330neo.

      In recent years I had become a little bit more optimistic about the 787 and thought it would soon start to generate cash for Boeing. But it is increasingly becoming obvious to me that the 787 will not contribute significantly to Boeing’s balance sheet for the foreseeable future. The only thing that could change this situation is if customers kept ordering Dreamliners in great numbers and at an acceptable price for both parties. But this does not appear to be the case presently.

      • As you know I think we are in a transition time and I don’t think anybody really knows what will come out of it. So I think any forecast needs to work with current orders and known trends.

        B787 I think will be cash positive by 2019 even at 10, as I think Boeing had probably managed to book those slots a while ago, while they were only planning 10. In five years they might be in trouble at this rate. Build costs don’t seem to be going down so quickly so I don’t see it replacing the B777 as a FCF cow.

        KC-46A rates look to me to be way too low to make for economic production or significant FCF. There will be deferred costs as well for the first how many?? and how long?? So as I said above, it all comes down to what price they are getting for the 737s. Military work so slow, due to financial constraints now if nothing else, that any new contracts like T-X won’t be bringing in FCF until 202?

        • @MartinA

          “It all comes down to what price they are getting for the 737s.”

          Yes, that is absolutely correct. Until not too long ago I thought the 777 was the biggest cash cow for Boeing because it was my understanding that the margins were relatively high compared to the 737’s. But the latter is produced in much greater quantities. In the meantime a new scenario that I had not anticipated started to unfold: Suddenly the 777 Classic was no longer selling well, the margins were melting away, its replacement was still years away, and it too started not selling so well shortly after its launch. The reason I mention this is because it shows how fast a favourable situation can change.

          Today the 737 has a huge backlog that is quite impressive. Like you, I don’t know what the margins are on this huge backlog. But even a tiny margin of 1 million net on each aircraft would generate 500M in profits at the end of the year. So if it’s 10M the profit will be 5G. That is where Boeing’s cash flow originates at the moment. But if we take the 777 as an example of what can happen it is reasonable to assume that a similar fate might await the 737. That is why I have been crying wolf for almost five years now. If I did not see the 777 downward trend coming I could see, way in advance, that the 737’s future was compromised as soon as the neo was launched. And two years later, with the first flight of the C Series, I became convinced that with this new aircraft pushing on one side and the neo pushing on the other the 737 would get squeezed out of the market sooner or later. In other words the 737 was doomed.

          The above is the reason why I have made so much noise about the NSA. If I have been less vocal about the 777 it is because it was in my view a considerably riskier project than the NSA. Actually I always treated the NSA as a given: low risk, small and easy, highly rewarding, and absolutely necessary. On the other hand I saw the 777X as a much more complex proposition, and therefore it was hard for me to gauge its proper value. Today my fellow posters from Europe have almost convinced me that it is too heavy, and perhaps also a little too big. I am talking about the 777-9 here, because I never thought there was a business case for the 777-8.

          So where does that lead us? Frankly I am puzzled. Especially because I am confronted by Boeing’s inaction. And if there is any sign they want to do something to avoid the iceberg it is certainly not the MoMster that will save the ship and its occupants. They may just have time to pull a few lifeboat for the shareholders while the rest perish, and with it one on the glorious chapters in American history.

          • The problem for Boeing is that “flinching” has a destructive quality of its own in the shareholder ecology.

            We’ve seen this on the 787 project all the time.

            Boeing today is a share holder value management corporation that also builds airplanes.

          • Yes Uwe and thats why its still standing. All those great companies that built planes they way they should be ?. eg Douglas and its DC-8 with its three spar wing and passenger windows every second frame.

          • And it appears to be a competitive cul de sac.
            The dinosaurs competed well over size … and then vanished.
            Boeing gobling up competition ( and all the other cases of corporate concentration ) run into diminishing returns and are redistributive and not productive.

    • Well supposedly the 767 is in the same situation the A330 is, its all been paid for and its all profit (well other than parts, material and labor, some light etc)

      And the big question is will the KC46 go beyond the original program block? USAF has big eyes, big programs and not the money to cover them all.

      should be interesting.

      Agreed that the production rate should be kept where it is.

      I think A&B are nuts to push it into the 60s.

      At least the tea leaves showed early enough for Boeing to stop the 787 at rate 12 or even relax back to 10.

      • Yes the 767 designs must still be on blueprints somewhere and its built in much the same way.
        I understood Boeings stategy was to under bid but then expect to ‘grow the tender’ in the usual USAF way. However that came unstuck when the the dozen or so ‘upgrades’ they presented as a package to the USAF at the start of development were rejected.

  5. NTSB confirms southwest did indeed shed a blade. Boeing asked to bid for up to 3 airforce ones,help is on it’s way.

    • “NTSB confirms southwest did indeed shed a blade.”

      This means the blade sliced through the Nose Cowl. Normally we would expect the blade to knock the adjacent Fan blades, and this often leads to the catastrophic disintegration of the latter. Looking at the picture the Fan appeared to be intact. I imagine it was the blade that caused the rapid decompression of the aircraft. So it may have sliced through the fuselage as well. I know some passengers were hurt; I just hope their injuries, apparently minor (?), did not come from the blade itself.

      • From what I read no injuries were caused by the shedding blade though it did depressurize the cabin.Most likely the injuries came form the rapid descent after the accident.

  6. The big assumptions are the 737MAX will be just fine, Boeing will sell lots at healthy margins. I think that’s a big assumption. Does Cai von Ruhmor own Boeing stock personally?

    • Don’t think it’s that big of an assumption at all, are you looking to buy Boeing stock?

  7. One huge miss on my above post, and apparently unexplained by the above analysts, is the effect on future FCF of increased advance payments, of an unknown magnitude, being made now if orders don’t pick up soon.

    • Thinking about the above seems to me to add to Norman’s Boeing doomsday scenario. The delivery of aircraft with a lower balance due, combined with extra discounts which were probably given to get accelerated payments, combined with a slowdown in orders running another couple of years… Where would that leave Boeing?

      • I apologize for my doomsday scenarios, for I don’t want to hurt the feelings of the numerous Boeing fans out there. I am just the lady reading the tea leafs. You can drink your tea with sugar if you want, but take my comments with a grain of salt.

      • Their credit rating is still fairly healthy so they can access the markets in the normal way, or sell off a subsidiary.
        I think the Washington state pension funds retirees can sleep easy in the next 5 years!

  8. Airinsight article says zodiac are aiming to get back on track by the end of 2017!Airbus must be quite cross by now.

  9. If Boeing cannot maintain 12 a month on 787 production with their backlog and future order Airbus will not be able to do 10 A350 a month more than 3 years as they have less backlog and bigger aircraft sell less. After almost 500 delivery 787 still has a bigger order than A350. Boeing will be okay.

  10. This maybe super -math… But… Does anyone have the numbers to calculate the outcome of the following scenario?

    How many fewer 777s have/will Boeing ‘build-and-sell’ between launch the launch of the X in 2014 and production stabilization in say 2022/3?

    Reason I ask is, so much is made of the inital new sales of the X… But they are a long way off… Vs. The lost sales because of the X between launch and re-stabilization of the newer model.

    Will those lost and ‘bargin-prices sales of the current 777 ever be recouped by the newer X. Factor in the X initial splurge are likely knock-down prices?

    The future for ‘new’ program’s must look very bleak when you factor in lost sales… Slower sales.. Slow ramp-up… And then some LONG time later… Back to destabilization… And perhaps a call for a newer model.

    Mind-boggling… No?

    The a330neo’s quick development time looks very much the way ahead.

    • “The future for ‘new’ program’s must look very bleak when you factor in lost sales… Slower sales.. Slow ramp-up… ”

      This, more than the cost of R&D, is what made Boeing opt for the MAX instead of a clean-sheet design. It is always more tempting to go for the immediate reward rather than investing for the long term. This is why so many people think the MAX was a great idea. Just look at the results: 2831 firm orders! People think that Boeing would have lost all those orders if they had launched the NSA instead of the MAX. Of course Boeing would have lost some of them to Airbus, but the latter is already close to saturation and Bombardier is not in a position at the moment to produce in such large quantities. So Boeing would still have garnered many orders and the NSA would be ready to EIS before the NG order book would have been depleted. By the time Boeing finally decides to launch the NSA the C Series will be coming off the assembly line at higher rates and the duopoly might quickly turn into a triopoly, in the narrowbody sector. But try to imagine the impact a six-abreast C Series built by Boeing would have had.

      • I wasn’t being Boeing critical… And was more curious about larger aircraft program where unit and client numbers are lower, and R&D/changes harder make profitable due to time-to-market.

        I guess the good thing and the 787/a350 is their ability to be more cost-effectively altered and optimized. And the 330 still seems to have life in it.

        Single-aisle is an easier sell/solution.

        • “I wasn’t being Boeing critical…”

          Of course not. I am to blame for taking a quote from your post to make an out-of-context comment about a subject with which I have difficulty to come to terms: the non-decision to develop a clean-sheet design to replace the venerable 737.

  11. Wow, lots of Boeing grave dancing today! Based on the above, does any commenter think Boeing’s NOT headed to eventual bankruptcy? Scott, it doesn’t seem like you’ll need to beat the room for Washington State officials to take any more action to foster Boeing in-state aerospace growth. They may want to get ready, though, for tens of thousands of coming Boeing layoffs! Makes me think “the fat lady’s about to sing”, and, as they say in the South, “That’s all she wrote!” (Nicely ironic that Boeing’s bankruptcy will most likely take place in the near bankrupt state of Illinois. Too bad most of the fallout’s going to be in Washington state!)

    • Well…I think Boeing’s transition to the 737Max will be relatively event free and so they should make some pretty good money on the 737Max within a relatively short time. Also, it appears that the cash-burn era of the 787 has ended and so it won’t be the financial drag on Boeing it once was. The 787-9 appears to be a great aircraft and will make Boeing some modest coin.

      Additionally, the F-35 stinks, so Boeing will probably be asked to make some more F-18 Superhornets. Likewise, the F-22 ain’t no champ either, so Boeing will probably get some more orders for F-15s.

      So…it’s not all gloom and doom for Boeing.

      • Firstly Boeing is incorporated in the State of Delaware (in 1934). Because the head office is now in Chicago doesnt mean a bankruptcy (LOL) would happen there.
        Remember GM bankruptcy was done in New York, not in Detroit where it was HQ.

    • “Nicely ironic that Boeing’s bankruptcy will most likely take place in the near bankrupt state of Illinois.”

      The scenario might be in place but we are not there yet. I don’t understand why you guys are so pessimistic! 😉

      Seriously, it is not too late yet. Far from it. Times ahead will be tough for Boeing for sure, but the situation is not as desperate as I like to portray it. This is not John Ostrower writing in the Wall Street Journal, so take what I say with a grain of salt. For it is often said tongue in cheek. Perhaps I should make a more liberal use of smileys. But that doesn’t mean I am not worried though. I am not so much worried as I am pissed off by the greedy types who run companies for their personal interest only. It seems to me that in the past we had CEOs who believed in the future and who were willing to take risks. When I say this I have Bill Allen in mind. He took one of the boldest decision in Boeing’s history, that of launching the 747, an airplane 2 1/2 times the size of the biggest Boeing airplane of the day, the 707. This spirit seems to have been lost in the transaction that led to the reverse take-over of Boeing by McDonell-Douglas.

  12. Well, the probable, severe coming cash flow dry up–that most commenters above seem to expecting the next few years–should drop the stock to $100/share or so. A $10 billion 787 deferred costs write-down mandated by the SEC by year end (that I expect will take place) should take her under $70/share. Heck, then you got a good chance of getting some hedge funds together to “bust her up” completely. I wonder what Boeing’s breakup value would be? Hmm, sell Renton, shut down the 47 line, consolidate the 37 lines into Everett, sell off the Boeing military and space lines of business. The civilian and maybe military after-services might be spun off into a separate, but related company. Sell the remains, a severely down-sized, commercial aircraft assembly company to the Japanese (Mitsu, etc.) The big remaining question, then, is are a group of willing hedgies willing to stand the political heat? I know this is a somewhat provocative scenario, but I think it just takes the “grave dancing” above to its logical conclusion.

  13. @MontanaOsprey

    Again, we are not there yet. But if I was you I would build a shelter and stock food for at least two years. 😉

    Jokes aside, I don’t want to go through another “Will the last person leaving Seattle — Turn out the lights” again. This is not even remotely possible. If there is one company that is too big to fail it is Boeing. It is an international icon and I cannot imagine any US president land somewhere sitting inside any other plane than a Boeing.

    In another post Jimmy made a good case for the viability of Boeing’s various programmes. Let’s see if I can demolish it, … I mean if I can see any value in it. 😉 Just joking again.

    Jimmy: “I think Boeing’s transition to the 737Max will be relatively event free and so they should make some pretty good money on the 737Max within a relatively short time.”

    – Good point. It is my understanding that the transition from the NG to the MAX will be short and painless. This means in the interval Boeing will be able to maintain a steady supply of cash. I have one caveat though. Let’s imagine a worst-case scenario. The NG backlog is depleted and the clock starts at zero on the MAX. The backlog is 2831 firm orders. No new orders are taken in and not a single option is exercised. The production is at a MAXimum of 57/month. That is 684 aircraft a year. In 4 years the backlog is down to zero. So even with this kind of Apocalyptic scenario Boeing would still continue to thrive for another 4 years, starting the clock in 2017.

    Jimmy: “It appears that the cash-burn era of the 787 has ended and so it won’t be the financial drag on Boeing it once was.”

    – Indeed. I think the worst is over. But again I have one caveat. The 30B forward loss is still there. The backlog is huge for a widebody but no new orders are coming in. If I was an analyst I would say “We remain neutral, pending order recovery. Hold position.”

    Jimmy: “F-35 stinks, so Boeing will probably be asked to make some more F-18 Superhornets.”

    I totally agree with that statement. Canada is already preparing the road for an acquisition of Super Hornets to replace its existing fleet of CF-18. They may still buy a few F-35s but nowhere near the original numbers.

    Jimmy: “Likewise, the F-22 ain’t no champ either, so Boeing will probably get some more orders for F-15s.”

    – I don’t know if the F-22 is a champ or not. All I know is that it is no longer in production. But I believe the F-15 has a few more years left.

    Okay, I feel reassured now. And since I have apparently succeeded in bringing the stock down I will go see my broker tomorrow to buy a few more shares before they go up again. 🙂

  14. As one of the afore mentioned doom and gloomers, ha ha, I’m going to predict no bankruptcy next week, but a long slow twilight of the soul. Boeing will be business as usual but being strapped for cash by buybacks and dividend payments will be forced onto the bond market for future development cash. Being not as creditworthy as it was interest goes up and available (affordable) development cash down. Less R+D and less investment in new programs means less sales. Slowly they draw back, slower rates, ending programs instead of replacing them, less products and less production lines until only a couple of things are left. No “too big to fail” scenario here, not out with a band but a whimper. Give it another 50 years and let’s see where we are.

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