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.
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.
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.”