Feb. 13, 2017, © Leeham Co.: In an extraordinarily bearish research note, boutique Buckingham Research Group (BRG) downgraded Boeing stock to Underperform (Sell) from Neutral (Hold) today.
BRG, which agrees with other aerospace analysts that Boeing stock is priced on free cash flow, sees FCF falling beginning next year. Buckingham predicts 737 production rates—which Boeing wants to boost to 57/mo to support FCF—will be short-lived.
Buckingham sees 777 Classic delivery rates dropping from Boeing’s target of 3.5/mo to “bottom out” at 2/mo.
Weak orders for the 787 means Boeing won’t increase production rates for the 787 from 12/mo to 14/mo. BRG predicts that in 2019 Boeing will announce a rate reduction from the current 12.mo to 7/mo on one production line, and this line will be only in Charleston (SC).
Boeing VP-Marketing Randy Tinseth speaks tomorrow at the annual Pacific Northwest Aerospace Alliance conference in Lynnwood (WA). Tinseth is always the eternal optimist in his presentations. We’ll see if he addresses anything in BRG’s bearish report.
Boeing guided to approximately a 1:1 book:bill this year during its year-end earnings call last month, or about 648 sales. BRG believes Boeing will be closer to 0.5:1 and a poor showing at the Paris Air Show in June will be a negative catalyst for the stock price.
With only 23 orders for 777s in 2016, BRG thinks Boeing won’t be able to achieve the 42 orders needed to sustain a delivery rate of 3.5/mo. Accordingly, Buckingham predicts the delivery rate going to 2/mo by 2019.
Likewise, BRG doesn’t see 737 production rates maintaining the planned 57/mo for even two years. Buckingham pegs the 737 market share at just 39% when factored against not just Airbus but also Bombardier and COMAC. Airbus has 54% of the backlog and BBD/COMAC 7%, BRG figures.
The weak sales will prompt Boeing to launch a New Small Airplane (NSA) by 2022, possibly with Authority to Offer (ATO) as early as 2021. (This would be just one year after the entry-into-service of the prospective 737-10.) Accordingly, BRG sees 737 production declining after 2020.
The most eye-opening prediction is that weak sales for the 787 could prompt Boeing to reduce, not increase production rates to as low as 7/mo after 2020. This is the most bearish forecast of any analyst, some of whom see a rate reduction to 10/mo. LNC previously indicated its forecast of 10/mo after 2020. Boeing doesn’t see “any scenario” where production will fall below 12, the CEO said on the year-end earnings call last month.
Ominously for the Seattle area, BRG thinks the 787 production at 7/mo could be only at the Boeing Charleston plant. (Assembly line workers will vote Wednesday whether to rejoin the International Association of Machinists union. If they do, this could influence production decisions between Everett and Charleston.—Editor.)
Of course this warrants breathless coverage here but not the Singapore order. And the AS/VA cancellation of all but a handful of 321NEO orders (already in assembly?) somehow indicates weakness for Boeing too. Probably both are Trump’s fault.
The Singapore “order” is currently just an LOI (though I have no doubt it will be firmed in the fullness of time).
If and when AS actually cancels all or any of VS’s A321neo orders, then we might have something to discuss?
@tex: The Singapore order discussion comes Thursday.
And to add in, LOI with Singapore is very solid LOI!
The “orders” of Boeing and Airbus aicraft to Iran (which were never firm to begin with) were on shaky ground, long before Trump, and seemed to be financed in part by stealth laundering via hostage ransom payment.
How dare Iran use previously frozen funds that were rightfully returned to them to purchase new, safe planes.
Never firm? Airbus is already delivering planes to Iran Air. You don’t get much firmer than that.
When you seize someone money and don’t give it back that is stealing.
Now if you want to let people sue and actually have that government pay out of that fund you can.
It turns out the US government paid for the costs.
But like it or not, the president the time negotiated a deal and that deal involved returning the money that had been seized.
I do not have any love for the government of Iran but we have to keep our end if we expect them to keep their end.
You want a different approach, well you got it and it scare the bee Jesus out of me.
Interesting post linked above about BRG’s view 3 years ago. They definitely hit the nail on the head with regard to dwindling 777 production. However their bearish analysis then has not exactly been reflected in Boeing’s performance, especially for 2016.
A few thoughts here:
1) Boeing stock was up 1% today so it appears the market does not think too much of the Buckingham thesis. Maybe there is a reason it is a boutique firm.
2) On Sept 2, 2014, Boeing stock was at $125 and today it closed at $168. So had an investor been dumb enough to listen to Buckingham’s advice, he would have missed out on an increase of 34% Thanks Buckingham!
I wonder why the article didn’t point out the past bad investment advice given the earlier coverage. [Edited]
@Teo: BRG’s original sell order on Boeing, several years ago and ahead of others, in fact successfully led the calls on BA’s stock decline. After it bottomed out, BRG upgraded to Neutral. Now BRG is downgrading again. Before you engage in your snotty remarks (edited out), I suggest you actually check out the facts and history.
Fair enough, I researched this and here is what I discovered.
At the beginning of last year, when Boeing was trading at $115, Buckingham issued a report with a bottom line conclusion that Boeing stock would trade flat to down in the foreseeable future.
In the year since, the stock price has appreciated to $168 as of 2/13/17.
That is an increase of 46% since the report was published.
I am glad to set the record straight.
” … appears the market does not think …”
Markets are greedy but not intelligent, they act reflexive and have limited attention span.
Go back to the Dreamliner Batteries debacle.
3 days and a night before the NTSB presented its findings a (fake) rumor was floated that Air Berlin would buy more (?20?) 789. ( at the time Air Berlin was troubled already and either wanted to convert or cancel outright.)
Share values jumped the next day and shew no change after Saturday when rather damning details were presented by the NTSB.
( I had written to the Journo at the time that the info was fake. He replied that “he got it from a stock ticker”. My impression was that he knew about he tenuousness and had no interest in being bothered. “I’ve done my job”)
And I thought they looked 3 years ahead?
Of course I believed in Santa Claus at one time to.
Now I think of the individual investors as stock fodder.
Well those folks are downright brilliant, they agree with me!
Breaking my arm aside from patting myself on the back, it is in line with my feeling.
I don’t have the resources but I do think 60 years of watching the industry as well as historical perspective from outside it is worth as much as analysts are.
And its FREE.
The concern over the B787 order book shows the potential for the A330neo to hurt Boeing at almost any level of global orders. I fear the next hiccup for both OEMS is the weakness of the ME3 order take up which will increasingly manifest themselves over the next 3 -5 years. They will signal a new and sober perspective on the FCF, particularly on the weak WB market
Soon to be followed by a weak narrow body market.
And yes it is sobering with the Skyline so heavily weighted to the ME carriers.
I still don’t think the A330NEO is going to be a huge impact on the 787.
There are operators that live and breath A330 and really don’t want anything else. Keep in mind a bit proponent is also pretty flaky (Air Asia).
The 800 is toast, making that for the very few orders would be even worse than a 767-400!
And justified or not, there is a large group that has committed to the 787 and the technology seems to have appeal.
Aircraft commonality with the ceo, and capex would be in its favour but only for specific distances, in particular those routes favourable to Asiana I suspect.
According to necessary pilot training the A350 is also just an A330 subtype.
yes and no, Trans World. I agree with you that Boein will not sell so many less 787 than without the 330neo, but at which price?
Without the neo, they would get significantly more, as they are teh only buy-able plane in that cathegory. With low fuel prices there will be a new – lower – market price, which Boeing must and will ultimatly accept. So they will sell almost as many, but earn so much less.
That said they also set a low bar themselves on the early offerings with some very generous pricing.
That pricing had lots of options and commitments associated with it.
It will be interesting to see how it plays out.
Interesting to note there is no mention of the deferred cost overhang at B. I guess we live in a FCF world and EPS do not mean much anymore if you are an analyst.
Of course shareholders may be a different proposition when the write off – which I have heard estimated at anything between $ 12 to $ 25 BILLION does hit, sometimes late 2017 or early 2018?.
I think we have got to the point that a significant write down is factored into the price. If cash is the key metric who cares about the accounts? All the cash spent is long gone and was paid for by the 777/737 cows 5-10 years ago. The only significance of the B787 is whether it will be in a position to generate the same sort of contribution to FCF over the next 10+ years. That is less down to the relative merits of the aircraft, which I believe are undoubted and more to events beyond BA’s control
Boeing could, I guess, sell more planes if it stops pretending to make $7.1 billion margin on the remaining 100 planes in the accounting block* I guess they will write off a large part of the deferred production costs and compete more aggressively on the unit price. They won’t be silly.
* If I’m correct that there are 100 planes still to be sold on the 1300 plane block, this means an average margin of $70 million on each plane they will sell from now on. The current margin, I believe, is low single millions. They also have to meet their cost reduction targets on the planes they have already sold.
This isn’t quite accurate, if memory serves. Not all of the 1,200 orders in the backlog are part of the 1,300 unit accounting block. Some of them are scheduled for delivery after line number 1,300, and thus would only be included in the accounting quantity after there is a block extension. Unfortunately, I don’t recall how many of the orders in the current backlog fit this description.
Even if Boeing were theoretically planning to recoup $7.1 billion from the last 100 787s in the accounting block, it could fix that problem and avoid a reach-forward loss by extending the block by another 100-200 units — which it seems likely to do later this year.
FF, Boeing should easily make $70 million gross margin on its next 100 orders for the 787 – but that’s not the problem. Under the accounting system Boeing is using it needs to make almost $70 million higher margin per aircraft than the average margin it expects for the program as a whole.
Currently Boeing does not make “single millions” of margin on the plane – it is making single millions MORE per plane than the average margin it anticipated for the program. In other words, it is already making good money on the plane, but it somehow needs to figure out how to squeeze almost $70 million more per aircraft and I just don’t see that happening.
Bruce: The current program margin is extremely low. I don’t know the exact number, but my sense is that it is in the very low single digit range. The cash profit per plane is pretty close to the reduction in deferred cost right now.
They are caught out by the slow down in new orders. Normally once the existing orders are locked in they can get extra revenue by their yearly announced price increases which also mostly apply to existing orders as well. Weak demand for new orders means unlikely to see much price increases on list price
Large companies don’t just write off enormous amounts in a given year unless there’s a tax advantage to doing so. Shareholders may, in fact, in 5-10 years take a hit from a 5-10 billion write down but in the grand scheme cash flow is what matters. If they’re increasing dividends yet again and increasing stock buyback under the Dec 2016 $14 billion dollar plan, what is the real market worry as far as their products are concerned?
They’re not real efficient with labor costs, and aren’t really a highly profitable organization in percentage terms (8 percent), but oh by the way that’s a couple points higher than Airbus. And both members of the duopoly are trying to use services and higher pricing to move toward the 12-14% mark in terms of margins for their commercial products (hey, I wonder if that pricing discipline is partially why the orders have slowed/stopped the past year, along with the huge backlogs?)
Sure, the stock (as with all companies) will at some point go down in a material way but it’s not going to impact their ability to finance/develop/deploy products (I think that’s the real point of this blog, discussing the industry’s products rather than the stock forecast this quarter).
This “oh, those guys I root against are really in trouble now” game is really pretty preposterous. A/B are both doing quite well.
The SWA/UA/SIA firm orders will probably come this year, for BA, and I am guessing some new models/options as well. That new wing plant right next to the 747/767/777 plant sure seems over-built relative to 77x needs.
“A/B are both doing quite well.”
Indeed they are, but for how long? Their backlogs are huge but the future is full of economic uncertainties, and this could add to the already softening commercial aircraft market. Although I believe Airbus is better positioned in terms of product strategy they still have their own set of problems; like for instance productions issues that impact cash flow and A400M development problems that hit the bottom line. And there is no question that Boeing will find itself in a tight spot in the coming years because of what I see as a convergence of negative occurrences; like the 777 transition period, the inability to increase the 787 production rate and the aging 737. Boeing may get some relief from the TX programme though if they win it; and I believe they will, because they have the best American offering, and the TX, like anything else the military will acquire in the next four years, will be American from tip to toe.
MY ADVICE TO INVESTORS: It’s not only time to pull out of aerospace but from Wall Street altogether. Like Buckingham I would go for a sell, but on all fronts. It doesn’t come more bearish than that!
Now if you will excuse me, I have to go back finishing this nuclear shelter I have been building since last November.
I had that discussing with the Investment guy.
Stocks are in relatively safe areas so hold pat.
Its only if you are maximizing risk that the pull back is needed.
The basic principal of investment is to buy low and sell high, and do both before anyone else does. By definition crashes take place at the top, not the bottom. We are presently at the top and the stock market may continue rising a bit more. So it is perhaps a bit early to start panicking. But I don’t really know and wouldn’t take any chance, considering the Mess we are in. My advice, for what it’s worth, is this: Prepare yourself for the Great Correction. But since I consider you my friend TransWorld I will go further, but don’t tell anyone: Prepare yourself for the Great Bust.
Thank you Normand.
I think decreasing the prices of B777-300ER & B787-8/9/10 are the only factors available for Boeing to play with at this time in order to fill the gap till 2020 and to make save move till B777x enter its normal production services.
Earlier, Airbus played it wisely by introducing A330 neo on time to keep A330 production line running till A350 is ready to take over.
Hmmm, the 330 NEO is behind schedule and the A350 is into production.
Fuel at $1 a gallon against $3 a gallon makes a significant difference. So airlines will now use up the flight hours of their existing aircraft because they are paid for. So there will be a slow down, but the overall picture doesn’t warrant the cuts suggested!
A rosy future for both Boeing and Airbus!
I’m thinking the whole market moves in unison. 7/mo 787 is 7/mo A350 and 0/mo A380.
Btw, why is Airbus commercial operating margin two points lower than Boeing?
How does that affect their future and current offerings/pricing?
I’d be interested in this site’s analysis, frankly.
Who can really say? As long as Boeing and Airbus use fundamentally different accounting systems to determine the profitability of their Aircraft sales, then such a comparison is almost pointless.
Airbus seems to use a standard accounting system with which everyone is familiar….while Boeing uses “Program Accounting” – with all the tricks that entails.
Is it too much to expect they you’re an accountant and know what you’re talking about?
If one uses the unit accounting figures which Boeing provides on their website, one finds the situation is quite different. 😉
I agree that an analysis of the relative commercial performance would be of interest. I believe that Airbus has been consistently less profitable than Boeing. The traditional arguments why are as follows:
1 the national nature of the subsidiaries has prompted individual units to seek profits at the expense of the whole entity. An old argument which I suspect is not the case any more
2 Airbus is an employment programme for Europe with little or no consideration to cost as it is heavily subsidised by nation states. – an out of date argument
3 Boeing employs program accounting giving them an unfair advantage – Boeing are required to report on US GAAP rules in addition to under program accounting and even under more conservative rules they are still consistently more profitable
4 Boeing uses more efficient production line processes as opposed to Airbus batch manufacture processes at fixed work stations. – I understand there are pro’s and con’s to both but plausible
5 Airbus has invested more heavily in automation from which they should reap future benefit – plausible
There are more, I feel that both OEMs will jealously guard information in this area
US GAAP already is not comparable to IFRS.
GAAP allows to overvalue assets significantly.
If you ask around 5..10% i.e. a US corp. that posts profits has a good chance to show losses under IFRS.
Unsurprising. GAAP rules are under industry “selfregulating” control.
Euro rules on employment make workforce “breathing” unattractive. This increases interest in expensive tooling to increase productivity.
On the US side expensive assets are frowned upon.
Easier to throw workforce at it on short time terms.
compare bulk loading aircraft vs using ULD devices that require less workforce and also less demanding on pax bags..
“I believe that Airbus has been consistently less profitable than Boeing.”
I suspect your belief is one of those new-fangled ‘post truths’ or ‘alternative facts’. 😉
If one is to compare relative profitability between Airbus and Boeing, then one has to use the unit accounting figures that Boeing throughfully provides on their website.
Using those figures we can see that, for example, in 2012 Boeing Commercial Airplanes reported a net profit of $4.7billion. However, had they used unit accounting like Airbus, they would have reported a loss of $3.7billion. A small difference of some $8.4billion!
Likewise in 2013 – a reported profit of $5.8billion becomes a $1.6billion loss using unit accounting. Another small difference of $7.4billion.
Nearly $16billion difference in two years!
Ironically, with unit accounting, BCA would have made a larger profit in 2016 than that reported via program accounting.
Without getting too overly excited about such matters I have done detailed research on both company’s accounts amongst many others for many years (20+) as part of my professional work. What started out as an analysis of IFRS vs GAAP issues segued into program accounting issues and more specific accounting treatments. I stand by my initial thoughts but I have always struggled to substantiate the underlying cause. I concede I could be mistaken but this is not a polemicist post. Uwe quite rightly brings up the issue of overstated assets but these accounting shenanigans should not affect the core P&L info. Stealth66 My only criticism of your methodology is that you are selectively choosing individual years to ‘prove a point’ and by doing so you ignore the long-term performance to which I allude. Regarding the current position I am less certain.
Sowerbob, of course I selected two years which demonstrated the biggest difference between program accounting and unit accounting. In my defence, I also pointed out that BCA’s 2016 profit would have been higher with unit accounting (and it will likely remain the case until they clear the 787 deferred cost mountain).
None of which changes my point that to compare the relative profitiability of BCA and Airbus Commercial, you need to use Boeing’s unit accounting figures.
I would guess the lower margin is related to Airbus having newer aircraft. Boeing aircraft are older and therefore development costs have paid far earlier.
first flights of comparable aircraft:
367-80: 1954 / A300: 1972 – 18 years (first jets)
737: 1968 / A320: 1987 – 20 years
747: 1969 / A380: 2005 – 35 years
767: 1982 /A330: 1994 – 12 years
777: 1994 / A350: 2013 – 20 years
787: 2009 / A330: 1994 + 15 years (conversion!)
Another point could be the disputed credits Airbus received by several EU states. The interest rates might have been low but Airbus has to pay royalties on every A320 and A330. For several EU members these credits are today a real good deal.
Considering the royalties Airbus has to pay back to the states as another kind of shareholders the real difference is much smaller.
Sowerbob, MHalblaub, …
… this might all be true, but the most decisive factor in reality for Airbus is the €-$ exchange rate. Therefore, i am surprised that the difference is still there, even if you would compare on that basis. So I wonder how Airbus could have been profitable at all when the € was 1.5$.
By reality i mean, if you have a comparable basis, which now you don t have if one hides 30 bn of costs and suddely only talks about cash flow, while the other is writing development costs off as soon as possible in order to reduce gains – and thus tax.
I agree I have factored in the relative exchange rates over time but this is the most insidious faults of any model because of the international aspect of sourcing in relation to all aerospace sub content. My models have assumed the dollar (convention) as the base but they are rudimentary at best. when I have done the work it has been concerned with other matters than these issues and I only give you what I have seen as a byproduct of the information analysed.
And yes Chris the exchange rate is material, particularly in recent times
When the Euro was massively overvalued at $1.40 and above Airbus was by their own admission in hot water.
Butchering the PIIGs and other currency manipulations
to chip away at the EU moved the EURO down.
Taking away from the _unused_ advantage the US had in exporting goods.
One would have to discuss what would constitute a fair exchange rate. The current rate is slightly below what some years ago was deemed to provide for a fairer representation.
EU exports are booming.