Dec. 13, 2016: Boeing yesterday announced another production rate cut for the 777 Classic, effective next August.
The rate goes to 5/mo. Because of the transition to the 777X, the actual delivery rate will be 3.5/mo.
Leeham Co. was the first in March 2014 to identify a major production gap and predict rates would have to come down significantly from the then-current 8.3/mo. Aerospace analysts on Wall Street began recognizing the gap shortly after.
Boeing stuck to its guns for nearly two years that it could maintain rates through the transition to the 777X. Officials finally acknowledged demand wasn’t going to match production. Officials announced a rate cut to 7/mo. Analysts didn’t believe this was enough. Yesterday, Boeing agreed.
Simultaneous with the announcement to lower the production rate at the cost of an unspecified number of jobs, Boeing increased its dividend well beyond Wall Street expectations. Accordingly, the stock rose in after-hours trading by $2.34 (1.49%).
Initial analyst reaction from three notes LNC received was generally positive, save for Goldman Sachs.
At what we assume are now the 777 delivery plans for 2017-2020, there are still approximately 70 open delivery positions for the 777. If Iran deliveries actually occur (political and financing risk remains), there will still be several open spots. Versus our model, which takes the 777 to 2/month in 2019, there are still 34 open positions in that time frame (including only 9 firm aircraft sold for 2019). We continue to see downside to consensus EPS and cash expectations from 777 rate, price and margin.
The $1.42 quarterly dividend creates a 3.6% yield. Taking the buyback authority back to $14bn implies a plan to sustain the current repurchase pace. However, BA is now slated to payout 180% of our 2017E net income estimate to dividend + buyback; which is not sustainable without increasing net leverage eventually. We remain concerned with new aircraft supply/demand; and while that can of course be debated, production is at an all time high (both absolute and % of fleet), in what has historically consistently been a cyclical industry. We therefore see risk in this planned use of capital, see downside to medium-term buyback expectations and note buyback historically has been pulled at cycle turns.
A large dividend hike was a possibility. Our expectation was for an increase of ~30%, above the market at 15-20%, with the potential range being anywhere from 20-50%. Our view was driven by a change in tone at the management level where the CEO recently noted there is “significant value” associated with the dividend and that the Board would take a “hard look” at its policy. Accordingly, we believed the 30% increase better demonstrates confidence in the cash flow story and to an extent addresses investor concerns over its growth, sustainability, and accounting, which is why shares are trading at a considerable discount on a FCF basis (where on 2018 consensus BA trades at ~10x while peers are at ~14x). The new quarterly dividend of $1.42/share now represents a yield of ~3.6% vs. prior of ~2.8% and a S&P 500 median of ~1.8%. We believe shares have the potential to re-rate higher and possibly trade at more comparable levels to peers on a FCF basis and in the $175-200 per share range (or ~25% above current levels). Thus, we raise our PT to $185 (from $155) premised upon a ~13x 2018E P/FCF.
Boeing announced: (1) it will cut 777 production to 5/mo from 7/mo in August 2017; (2) a 30% dividend increase; and (3) a new $14B share buyback authorization that replaces the prior program – i.e., $7B of authorization was added. Overall, we think the positive of the dividend increase will more than offset the negative of the 777 rate cut as the effective yield now approaches 3.6%. Based on lower 777 production, we reduced 2017E EPS to $9.30 from $9.45 and 2018E EPS to $10.00 from $10.65. Our valuation range is unchanged at $155-$160 based on 14x 2016E FCF/share.
I have never understood this idiotic difference between “production” rate and actual deliveries introduced by the less than honest Boeing directors. Ofc, while producing 777X test frames the deliveries will be lover than the production during that period. But what matters here is only the deliveries from a financial standpoint, how many planes is on order and what delivery rate is required to deliver theese ordered planes.
I couldnt really figure it out, but it seems like the actual output of 777W airplanes going to customers is going down to 3,5/month with this anouncement from August 2017, but the obscure so called “production” rate will be at 5/month, the difference due to 777X and “blanks” into the stream. But are really the actual production of the 777X planes set to start as early as August 2017? Have they started to make the first wing for the 777X yet?
Yes, I find that a little disingenuous too. A production rate should mean exactly that, how many items are produced. A line rate of 5/mo that produces 4 per month? Seems like the line rate is about as important to the financials of the business as what temperature they keep the building at. Maybe the temperature is actually of more concern.
You normally “pulse” your production to get the material flow in sync. Hence the pulse rate. Then you can calculate that a new model into the line will take longer time to make and you allocate time to solve all issues that arise that will need revised tooling and/or methods, but you don’t want to ruin the planning for the existing production hence the “blanks” so you build the old models in the same tempo.
I can understand that, sort of. But why are Boeing mentioning at all and even emphasize the “pulse” rate if not for trying to make the impression that the production is higher than it in reality is?
Before this talk about we will maintain full 777W production throughout the 777X transition phase there was never any mentioning on the pulse rate except for maybe some technical discussion. It was always about actual production rates.
So, I have come to the conclusion that Boeing fully thought that finacial analysts, blogs like LNC, its readers and the public in general was complete idiots that could easily be led to belive the real output to be significantly larger than it actually is. The only reason to try to mislead in that way must be to shore up the stock price and hence the executive bonus.
And they have actually to some degree succeded in that, that is maybe the worst part of it.
It seems many are ready to *buy* theses blanks. It could turns a nice profit for Boeing !
Boeing accounting logic would tell you that the 787 production was 10/mo from the get go. They were just firing “blanks” in the beginning to work out the kinks and issues arising from the introduction of a new model into production.
The level of share buybacks and dividends proves that Boeing has no need for Exim. They could easily finance the riskier deals themselves and make the same profit that the government apparently does.
Or am I missing something?
I think you have it spot on.
I would change the risky deals somewhat, aircraft are one of those assets that are almost impossible not to fly across a border.
If they can’t seize it in country, they catch them out of country.
Maint becomes an issue, pressure on suppliers and parts etc.
It seems so shortsighted to focus on FCF in the near term on a product which is coming to the end of its life cycle. Surely of far more import is both the successful development of the B777x and the attractiveness of that product into the future. I see the B777x as the key to Boeing’s wellbeing going forward. It replaces their most important cash cow. Will it be a winner? Well it could easily kill off the A380 but at the same time all trends seem towards smaller, less risky WB’s and it has the very real risk of being irreparably damaged by the A350-1000/2000
The issue here is cash income to the company vs cash outlay.
While Golman S put it nicer, essentially what they are saying is you are eating your seed corn and you are in the middle of a drought.
This has come up before. No one uses seed corn anymore, farmers get it from the specialist seed suppliers.
Oh come on, no one owns slaves in the US anymore but we still have the Electoral Collage.
It expresses the situation very well and maybe you think the rest of the world plants the way the US does?
Last slaves were freed when Wells Fargo hourly wage retail slaves were released from their 14 hour days making sales calls to hit quotas.
I really think u lot should stay on topic. Some of us dont appreciate the politcal innuendo in many posts. Isnt it electoral college not collage? As for the other smear, Trump is right that $4 billion is steep to upgrade the 747 Air Force One program. Can we please leave out this political innuendo. Some of us didnt appreciate the author calling the president elect a doofus either. Isnt this all going to fall under Elaine Chow’s remit – She is to be Trumps transport secretary. (Oh and engineer will be Secretary of State instead of the usual lawyer. Some of you, not many maybe, will appreciate that unconventional change).
I think the 777-8/-9 serve a smaller market than the 777-200ER/300ER serve.
The successful 787 is mainly successful because of the 787-9. The 787-10 may be very efficient. But it is also short ranged with a pay/fuel load typical for flights from Asia. That doesn’t improve flexibility over e.g. a 777-200ER. http://i298.photobucket.com/albums/mm262/ferpe_bucket/PRchart787-10333359.jpg
The 777-8 will be a heavy and expensive ULH machine. The space between 787-9 and 777-9 is where the XWB’s are. It’s the middle of the twin aisle market.
It appears most of the large 777-200ER/300ER operators ordered XWB’s. http://i191.photobucket.com/albums/z160/keesje_pics/777%20operators%20dec%202016_zpsdmmta3hl.jpg
Do I feel Boeing needs a bigger 787? Yeah.. Boeing apparently not. Or at least they say so, now.
Could a 787-10ER work? Is it even technically feasible?
Be that as it may, the state of the art wing and GE9X engine are a size bigger than the A350 combo. In addition to offering more capacity, the 777-9 will probably beat any A350 in fuel efficiency in terms of payload carried per pound of fuel burned.
I think the asymmetric nature of this competition is what makes it interesting, it could swing either way with scope for both to have a niche. Which is the bigger niche will play out over many years
How, when the A350 /2000 is reputed to be 20 tonnes lighter?
777X has sold to the ones that think they need it.
Ergo, is there enough market left for the A350-1100?
Yes, it does have a lighter fuselage going for it. But, I think for it’s weight, it is underwinged and underfanned for best efficiency. Or maybe the 777x has room for more weight. Problem for the 777, is it has hit the limit for the wheels. Similarly, another problem which will hurt the A350-2000 could be rotation angle.
Comfortwise, the A350 wins in coach. One cool untapped potential I see for the 777 is the four seats in the middle, can these fold into a couch and bunk for three people? That way the critical length for laying with knees unbent in a ‘skycouch’ is met. This is three lay flat seats in minimum floor area of 2500 sq. inches. As Sowerbob said, this will be interesting to watch how it plays out, not cut and dry either way.
In reference to the Trump B747 comment: In all the news covering Trump’s comment about Boeing gouging the government on the B747 Continental plane used for Air Force One, there is no mentioned that it includes Three 747s with the world’s latest electronics, nuclear fallout protection systems (whatever that means, but they’re expensive,) and more crazy options then I could list.
Looking Glass, ala Nightwatch ala Mercury:
That adds a bit of a laugh as the 4 E4s (747-200) are not being replaced.
A fair amount of duplication involved between E4 and E6 (707 based)
An E4 is in the Presidents vicinity as alternative to AF1.
The 777-8X is almost exclusively built for the gulf carriers to open up longer distance city pair routes in 2 hops. Its a bit of a niche plane really. Those airlines that want to carry more passengers than an A359 over even longer distances will use it. Can’t see it totalling more than 500 orders over its lifespan but never say never.
Yep, also pretty seriously. passenger restrained to get Singapore to New York.
IMHO – With bucu buybacks and raising dividends, it appears that the most important thing is to improve the pay/options for the executivesuites and corner office holders. its the old Jack Welch ‘ shareholder value ‘ game. As to ex- im bank issues, most do not realize that EX- Im is one of the few quasi- govt agencies that makes money in most years.
the real political objection to the EXIM bank is that the Wall St. Casino does not directly profit from EXIM (and hence, it reduces the quantity of bribes congress receives).
in their mind all government activities that Wall St would be able to generate profit from should be done by Wall St. regardless of whether or not it is in the public interest for that to be the case, because that mansion on St. Barts isn’t going to pay for itself.
It is correct that Ex-Im bank makes profit and increases the supply of credit that otherwise would turn to Wall Street or Airbus Export Financing. Wall street together with US intelligence managed to stop EU EX-IM credits by going thru UK Serious Fraud Office and for some strange reason block EU Ex-Im financing. Now the private Banks are the only source and we have a big drop in expensive big jet orders until things go back to normal bribes and goverment support that historically happens.
Yes they do.
Its the fact that Boeing can do the same thing if they so desire.
If it had a goal it would be to enable others to get a export market.
Boeing is 60% or better of an export market and should be able to stand on their own.
They have a finance arm, they just don’t want to use it.
“I think the 777-8/-9 serve a smaller market than the 777-200ER/300ER serve.”
They will serve a smaller market because they’re not replacing the the 77Ws and the 777-200ERs 1:1. The 787-9/A350-900, A350-1000 and additional 77Ws for the short term if oil stays around $50/bbl. If a 77W operator and you’re looking to open new routes, carry more cargo and passengers to existing routes then you can decide between the 777-8, 777-9, and the A350-1000.
“The 777-8 will be a heavy and expensive ULH machine. The space between 787-9 and 777-9 is where the XWB’s are. It’s the middle of the twin aisle market.
It appears most of the large 777-200ER/300ER operators ordered XWB’s.”
What does XWB have to do with the decline 777 production rate???
“What does XWB have to do with the decline 777 production rate???”
The point being the XWB has nothing to do with the new 777 production rate.
so you don’t think that the relative efficiency of the A350 is impacting Boeing’s ability to sell -300ERs to fill the order gap?
I think that the A350-1k unexpectedly good performance (economic and payload/range both) ended up being enough better than the 300ER that it forced Boeing’s hand into redoing the 777 about 5 years earlier than they would have otherwise.
and in the world of widebodies, where fuel costs matter a lot, if you were an airline would you rather stretch the life of your older 777s (with similar running costs and paid off vs a new ER) to wait for the 777x or jump brands rather than buy an end of line ER.
Some and some. Jump to the conclusion at the end but there is some meat in between to support it.
Watching the A330/A350 program it was evident that there was a total bias to Airbus by some airlines (no problems with that from my standpoint).
That was clear when the A330 was going to terminate and the buyers had to make a choice of the A350 vs a 787 that did compete with the A330.
They went to the larger more costly and not efficient A350-800. To me that’s not just a bias its pretty blatant ad that shoots the ” Industry Buys The Best Product” and capitalism always goes the efficient way etc thing vs we buy from one entity no matter how poor the fit is.
Then the 800 got canceled and back to the A330NEO, and Hawaiian Airlines does not even want the big one they want the small one that very few want so I am going to guess they get moved to the big one (900?)
Airbus is probably not going to produce the NEO-800 as there is little demand other than Hawaiian (TransAsia is shutdown) so only 10 of the 800s on order.
So, some of the A350 orders are airlines that won’t buy Boeing, that’s obvious.
Finnair and Air Asia come to mind.
Some like Qatar and Singapore buy both and it fits into their needs.
Some got good launch deals.
I would guess 60% go either way and that is a significant cutting into the 777 segment.
I’m confident that the A350-1000 is a very efficient and will make up a big part of the 77W replacement cycle but it’s not like A350-1000s are selling in favor over the 77W.
“I think that the A350-1k unexpectedly good performance (economic and payload/range both) ended up being enough better than the 300ER that it forced Boeing’s hand into redoing the 777 about 5 years earlier than they would have otherwise”
There’s 2 ways to look at this scenario. One being yours and the other being that the since the Since the launch of the 77W in the early 2000s, Boeing had to be proactive and refresh the 77W with what we see as the 777-8 and 777-9. 5 years early suggests that Boeing should have launched the 777x in 2018 a year after the A350-1000 debuts in commercial revenue service, meaning that the 1st EK copy of the 779 would have been delivered 2025. There’s no way Boeing would go for that, hence why we have what we see before us.
“and in the world of widebodies, where fuel costs matter a lot, if you were an airline would you rather stretch the life of your older 777s (with similar running costs and paid off vs a new ER) to wait for the 777x or jump brands rather than buy an end of line ER.”
A lot of that is dependent on the price of oil. UA knows that the 77W is less efficient than the A350-1000 yet they bought 14 of them and could alter their order of 35 A350-1000s for other widebody aircraft, not excluding the 77W. All airlines don’t think the same but what they all share is a grand desire to make as much money as possible while spending the least amount of money. A snapshot of UA, AA and DL from 2007 to now is a good indicator to what I’m referring to.
“They went to the larger more costly and not efficient A350-800. To me that’s not just a bias its pretty blatant ad that shoots the ” Industry Buys The Best Product” and capitalism always goes the efficient way etc thing vs we buy from one entity no matter how poor the fit is. ”
What about: some airlines looked beyond the PR bluster and drug like rush? 🙂
The “Buys Best Product” and “capitalism is efficient” bla, bla was _again_ shot up by this Drug like rush for “Carbon Über Alles” and the “Dreamliner Fantasms”.
It is nothing more than unsupportable dogma.
The point is that some were not going to buy a Boeing no matter how bad the fit.
Those will have taken out sales to Boeing possibly since they might have been forced to buy if they really needed that 777 category.
Now, even if the A350 does not fit, its still close enough it will work.
So it may very well have had an impact on 777 sales.
How much will the the dividend hike help GECAS? How many shares of Boeing does GE Capital own?
Disclosure: I am a GE shareholder.
GE Capital was mostly sold off its divisions, eg GE Capital Corporate Finance – Aircraft was sold to Global Jet Capital.
It should be in your GE annual reports if you look back
I just can’t understand this Exim thing.The only way it makes sense, is that that the risk costs the government the same as the banks, but that risk is disguised among all the other vast government debt. So in other words it costs more than people think. Another alternative is that it is actually quite risky, but the government has never been hit with the full liability. Maybe Boeing thinks that the return on capital is too low.
It just seems to me that the Exim enthusiasts seem to be offering a free lunch.
Like a lot of things its a counter to what’s offered else where.
Like a lot of things its gotten hi-jacked by the ones with the lawyer (Boeing, GE)
Nothing new, good news is the PE will fix all that!
Not to mention that bridge in downtown Manhattan I will sell you, win win.
Sorry, you don’t have such bridge for sale! But with the poor financial state of the New York City employee retirement pension funding–and the City’s “tax to the max” attitude, I fully expect to watch New York City actually sell such bridge to the private sector–and the Manhattan and Willliamsburg Bridges to boot in the next five years! This is one way they’ll have to meet looming plan deficits. (Truth in Accounting’s current NYC Employee Retirement System rating: : “D”.)
Airlines with good financial performance (or wealthy backers) have access to good commercial financing. So obviously what’s left over is risky. Maybe in a few targeted situations, Boeing Capital can finance export sales, but it would be very difficult to get an adequate risk-adjusted return on capital while charging reasonable interest rates. If forced to choose between financing a risky deal for a low interest rate or walking away from the deal, Boeing’s going to walk away.
The calculus is different for the federal government. First, it has a much lower cost of capital than Boeing. (And Boeing’s cost of capital would be even higher than it is today if it were financing lots of risky export deals through BCC.) Second, aircraft owners might be less likely to default on debt owed to the US gov’t compared to a private company.
But more importantly, the gov’t gets a substantial cut of each aircraft’s sale price. For a $150 million widebody sale, I wouldn’t be surprised if the feds pocket $30 million of incremental revenue, just looking at corporate taxes on the profits from Boeing and its supply chain, along with income taxes for workers in all of the jobs directly and indirectly supported by production.
So in essence, right now the government IS getting a free lunch. If you count the incremental tax revenue the government stands to receive by encouraging more exports, ExIm goes from making small profits relative to the risk incurred to generating huge windfalls for the government, even on a risk-adjusted basis.
Anyway, that’s my two cents.
Well its an interesting two cents but I think it misses the fact that the asset itself can be recovered for a high part of its value.
Say in 4 years you take it back, you got 4 years profits out of it (marginal or not) and you still have 80% of the value (ball park)
My point is that GE and Boeing (not the only ones but the big two) have large staffs of attorneys whose job is to game the system.
They don’t need it.
with EXIM, the risk is fully priced in.
what is not priced in is shareholder profit, executive compensation and congressional bribery.
EXIM makes a small profit for the government relative to the dollars involved, a commercial bank would charge higher rates and profit massively, because short of hull loss (which should be covered by insurance), aircraft loans are almost zero risk. the aircraft have substantial residual value, so even if a borrower defaults, the aircraft can be resold easily and at a good price.
The new GE executive at Boeing needs to bring in new blood into the sales organization. The career Boeing executives just aren’t cutting it.
Could you flesh that out?
They also have product line issues, A321 they can’t compete against and the abandoned 777-200/300 segment.
A330NEO for some users.
“For a $150 million widebody sale, I wouldn’t be surprised if the feds pocket $30 million of incremental revenue, just looking at corporate taxes on the profits from Boeing and its supply chain, along with income taxes for workers in all of the jobs directly and indirectly supported by production.”
It would be interesting & relevant to know how much tax actually ends up with the feds. Boeing has a reputation here.
If Airbus do it as well, then you haven’t gained any sales, you’ve just made the aircraft cheaper. It must be costing someone, otherwise everyone would borrow money from the government, free money all round. I’m not an economist.
Me either, I suspect the complexities of it mean player like Boeing and GE have it down pat and others struggle to be able to get into it.