Odds and Ends: $19bn cash turnaround for Boeing
We’re catching up from a week out of the office and one thing that especially caught our eye is this comment in a research note late last week from JP Morgan:
Potential cash turnaround on 787 is enormous. By the end of this year, Boeing plans to have amassed $19 bil in 787 inventory, most of which will consist of so called deferred production costs, or the extra cost above the long-term average to build the first few dozen aircraft. We expect the initial 787 block to be 1,000 aircraft, which should take ~8 years to deliver. Even if the program never contributes a penny of earnings and ends after that initial block, it should therefore generate ~$19 bil of operating cash flow over that delivery period, or an average of ~$3/share annually. While from an accounting standpoint this would be a reduction of inventory, it is best thought of as underlying cash profitability on the aircraft (say 20% margin on 120 units/year times $100+ million each) that is offset perhaps entirely by the amortization of the sunk cost from the delays. The potential $3/share of positive 787 FCF compares to an expected cash outflow of $8/share from 787 inventory build this year, plus another $3/share of R&D and capex, making the total 787 outflow ~$11/share. Overall, the vast majority of the cash flow improvement opportunity results from elimination of the cash outflow, so while the difference between a 20% margin and a 10% margin might be significant, it pales in importance next to simply getting the program ramped up and into the black.
Other items of note:
From Wells Fargo, in a note from last week:
Boeing 737NG. Boeing still expects to decide on the 737 re-engine vs. all-new plane in 2011. Under any scenario, we estimate that commercial R&D should decline over the next few years to about $2.3B in 2013-2014. Based on our recent discussions, we expect Boeing will not re-engine but rather develop an all-new airplane with an entry into service in mid-2019. The key characteristics of an all-new airplane likely include (1) the baseline plane will be all-composite; (2) the plane will be optimized for the 170-180 seat market; (3) the engines could be 4-5% more efficient than what is being offered on the A320NEO; and (4) despite the larger size of the airplane, we would not expect this plane to offer a complete replacement for the 757.