AJDelphi Posted October 15, 2015 Share Posted October 15, 2015 I have been doing some thinking on this as well. If I remember correctly Delta tends to buy older aircraft as opposed to new, so Anderson's comments shouldn't be a big deal for future deliveries. He doesn't specifically say it, but I wonder if Anderson is referring to the Used Wide-Body Aircraft market being in a bubble....I need to try and check but maybe Singapore Airlines is just purchasing new wide bodies, hence the availability of their 8-10 year old 777's. Either way those engines are still going to be under service contracts. Here is the transcript from that question. Michael Sasso - Bloomberg News Good morning. Yes, I had there's kind of the rumor mill has been hot lately about Delta looking at some 777s coming out of Singapore. Can you just talk about that and is there any truth to that? Richard Anderson - CEO Yes, I'd be glad to. Well we're seeing a huge bubble in excess wide-body airplanes around the world and we've been approached by more than one party. I mean the market appears to be the 777-200s about 9 to 10 years old the price is about $10 million. And on A330-200 the lease rate is about a fifth of what it would be new. So we do think that the aircraft market is going to be right for Delta and over the course of the next 12 to 36 months and we think that that weakness in that aircraft bubble in wide-bodies is going to spread to narrow-bodies and that there will be some huge buying opportunities because low interest rates really have created a huge wide-body bubble in the world. Singapore Airlines, I think has 70 of these airplanes that are coming off lease or being retired that are 8 to 10 years old. Link to comment Share on other sites More sharing options...
rb Posted October 15, 2015 Share Posted October 15, 2015 Yea, all of this seems to point to Delta's strategy. Basically they're gonna buy older wide bodies and would have an older fleet and save some money. Buy for example if they buy 777s from Singapore then Singapore will buy new jets since they're not looking to cut routes. That doesn't really affect the engine market or the airframe market since I don't think anyone believed that those 777s would be retired after only 9 years. Link to comment Share on other sites More sharing options...
AJDelphi Posted October 15, 2015 Share Posted October 15, 2015 Singapore Airlines has 63 A350's on order from Airbus right now and 5 A380's. So 68 in total which pretty much explains the 777's that are coming to market and how they will be replaced. They have nothing on order from Boeing. Towards the bottom of the page you can download the excel file for orders, deliveries, operators. http://www.airbus.com/company/market/orders-deliveries/ Delta does have some new planes on order as well. So they aren't entirely just buying old aircraft. 32 A330's 25 A350's 18 787's (Dreamliner) Link to comment Share on other sites More sharing options...
rb Posted October 15, 2015 Share Posted October 15, 2015 And all of those birds will come with shiny new Trent engines :) Link to comment Share on other sites More sharing options...
TheAiGuy Posted October 31, 2015 Share Posted October 31, 2015 This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper. Link to comment Share on other sites More sharing options...
KJP Posted October 31, 2015 Share Posted October 31, 2015 This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper. They are posted on the company's website and on the website of the London Stock Exchange. Link to comment Share on other sites More sharing options...
TheAiGuy Posted October 31, 2015 Share Posted October 31, 2015 This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper. They are posted on the company's website and on the website of the London Stock Exchange. Ok, thanks. So there is no equivalent to the SEC reporting, or is all of that filed with the stock exchange? Link to comment Share on other sites More sharing options...
xtreeq Posted October 31, 2015 Share Posted October 31, 2015 This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper. I find this site useful http://www.investegate.co.uk/CompData.aspx?code=RR.&tab=announcements Link to comment Share on other sites More sharing options...
TheAiGuy Posted October 31, 2015 Share Posted October 31, 2015 This is probably a dumb question but does anyone know where I can find disclosures on RR.L? I'm not that familiar with London stocks and I'm trying to dig deeper. I find this site useful http://www.investegate.co.uk/CompData.aspx?code=RR.&tab=announcements Oh, that's nice. Thanks Link to comment Share on other sites More sharing options...
portfolio14 Posted November 1, 2015 Share Posted November 1, 2015 I still have no idea how to handicap the EU regulatory risk. Link to comment Share on other sites More sharing options...
rb Posted November 1, 2015 Share Posted November 1, 2015 I still have no idea how to handicap the EU regulatory risk. Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know ;) Link to comment Share on other sites More sharing options...
portfolio14 Posted November 2, 2015 Share Posted November 2, 2015 I still have no idea how to handicap the EU regulatory risk. Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know ;) You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk? http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007 Link to comment Share on other sites More sharing options...
TheAiGuy Posted November 2, 2015 Share Posted November 2, 2015 I still have no idea how to handicap the EU regulatory risk. Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know ;) You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk? http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007 First thoughts: I think it would be difficult for European regulators to do much to the business model. It looks like a big benefit for the total care contracts that RR sells is accounting: a sell with a TotalCare contract is booked as a gain under IFRS but a OE sale without it is booked as net £0. From what I can tell, it doesn't look like RR expects more money long term over this model (please correct me if I'm wrong!) As for the availability of different engines for a single airframe, I'm not sure how a regulator can force this to change. It is certainly the bigger risk IMO, and I would guess it matters whether their has been collusion between OEMs (that would matter more in the US -- I know very little about antitrust and less still about European antitrust). Link to comment Share on other sites More sharing options...
portfolio14 Posted November 2, 2015 Share Posted November 2, 2015 I still have no idea how to handicap the EU regulatory risk. Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know ;) You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk? http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007 First thoughts: I think it would be difficult for European regulators to do much to the business model. It looks like a big benefit for the total care contracts that RR sells is accounting: a sell with a TotalCare contract is booked as a gain under IFRS but a OE sale without it is booked as net £0. From what I can tell, it doesn't look like RR expects more money long term over this model (please correct me if I'm wrong!) As for the availability of different engines for a single airframe, I'm not sure how a regulator can force this to change. It is certainly the bigger risk IMO, and I would guess it matters whether their has been collusion between OEMs (that would matter more in the US -- I know very little about antitrust and less still about European antitrust). I think you mix up 2 different issues: (1) linked contracts vs unlinked contracts; (2) TotalCare, RR's business model. You are flying blind if you are long and have these key issues mixed up. Link to comment Share on other sites More sharing options...
TheAiGuy Posted November 2, 2015 Share Posted November 2, 2015 I still have no idea how to handicap the EU regulatory risk. Do you know how to handicap any regulatory risk? If so please PM me cause I want to know how and I don't want anyone else to know ;) You assign not weight to the possibility that the regulator will rule their business model invalid? Not a fat-tail risk? http://www.ft.com/intl/cms/s/0/9b7a7434-6e9b-11e5-aca9-d87542bf8673.html http://www.reuters.com/article/2015/10/07/rolls-royce-trent-idUSL8N1270ML20151007 First thoughts: I think it would be difficult for European regulators to do much to the business model. It looks like a big benefit for the total care contracts that RR sells is accounting: a sell with a TotalCare contract is booked as a gain under IFRS but a OE sale without it is booked as net £0. From what I can tell, it doesn't look like RR expects more money long term over this model (please correct me if I'm wrong!) As for the availability of different engines for a single airframe, I'm not sure how a regulator can force this to change. It is certainly the bigger risk IMO, and I would guess it matters whether their has been collusion between OEMs (that would matter more in the US -- I know very little about antitrust and less still about European antitrust). I think you mix up 2 different issues: (1) linked contracts vs unlinked contracts; (2) TotalCare, RR's business model. You are flying blind if you are long and have these key issues mixed up. Okay, so that's not needed. My understanding of antitrust (which, to be clear, is cursory) is that linked TotalCare agreements would be the problem, specifically, the sales pressure to have airlines sign TotalCare agreements. That would be my read of "forced into anticompetitive contracts". We might guess that unlinked TotalCare agreements are fine, as they are negotiated separately, and that T&M is very okay. Without TotalCare, RR stills makes money on T&M, but they can't book any of those profits at time of sale except for the "contractual aftermarket rights", which is basically accounting goodwill so they don't take a loss on the sale. I can't tell (so far?) how much more profitable TotalCare is over T&M but I can tell that linked TotalCare allows them to recognize positive revenue on a sale. If an antitrust investigation becomes focused on linked TotalCare contracts, then aside from whatever penalties RR has to pay, it's unclear to me how much, if at all, cash flow would be effected. If regulators find broader issues with the business model, then the consequences would obviously be worse. Link to comment Share on other sites More sharing options...
ZenaidaMacroura Posted November 12, 2015 Share Posted November 12, 2015 So valueact and sequoia are not having much fun outside of VRX either: http://www.bloomberg.com/news/articles/2015-11-12/rolls-royce-says-2016-profit-to-be-hit-by-990-million-headwind Roll Royce shares down some 20% -putting in a new low. Link to comment Share on other sites More sharing options...
Guest Grey512 Posted November 12, 2015 Share Posted November 12, 2015 Looks interesting here.. Upside: If you exclude the past 2 years (which were a disaster), the average annual unlevered FCF over the past business cycle is around 720m Pounds, and the annual top-line growth was 8%. Stick a 22x multiple on that unlevered FCF and you get to an EV of 16 billion Pounds and market cap in the same area, so that's a big upside from the current price of 10 billion. 60% upside. Downside: But then again, this kind of a bumpy business... Who knows whether the turnaround is doable. What if the "normalized" unlevered FCF is 500m Pounds? (if you include the last 2 years, which are really bad, it averages out at around 440m Pounds over the past 12 years). What if the forward growth rate is 4% and not 8%? Put an 16x multiple on that 500m and you get to 8 billion EV and market cap, or 20% downside from today. So this looks kinda asymmetric. Could be bumpy but I am tempted. The CEO's track record at ARM also looked good, but I wonder what % of that is his skill and what % of that is a secular sector tailwind during his time there. Everything at a price.. Link to comment Share on other sites More sharing options...
petec Posted November 12, 2015 Share Posted November 12, 2015 Stick a 22x multiple on that unlevered FCF How do you get to that multiple, may I ask? Link to comment Share on other sites More sharing options...
Guest Grey512 Posted November 12, 2015 Share Posted November 12, 2015 petec - totally finger in the air. No real work done, as of yet. E.g. if (upon completion of the turnaround, say in 2017) RR can "sell" the vision of a defensible and visible 8% cash flow growth to the markets, the markets then could reward the company by valuing it at a 4-5% cash flow yield. Someone believing in that growth, if they turn out to be right, will see a decent forward equity return (8% growth + 4.5% current yield + couple of points due to leverage, i.e. north of 12%). Link to comment Share on other sites More sharing options...
KCLarkin Posted November 12, 2015 Share Posted November 12, 2015 Upside: If you exclude the past 2 years (which were a disaster), the average annual unlevered FCF over the past business cycle is around 720m Pounds, and the annual top-line growth was 8%. Stick a 22x multiple on that unlevered FCF and you get to an EV of 16 billion Pounds and market cap in the same area, so that's a big upside from the current price of 10 billion. 60% upside. Unfortunately, FCF isn't a useful way to value this business given the timing mismatch between revenue and costs. You have very large upfront costs that will pay off over the next decade or two. The accounting earnings try to better match current costs with current expenses but are funky at best. edit: See slide 24 in this presentation to see the timing mismatch: http://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/investors/results/2015-interims-presentation.pdf Link to comment Share on other sites More sharing options...
fareastwarriors Posted November 12, 2015 Share Posted November 12, 2015 Who's buying? Link to comment Share on other sites More sharing options...
TheAiGuy Posted November 12, 2015 Share Posted November 12, 2015 Considering it. I'm also considering tax loss harvesting and then buying back. They'll announce more details on the 24th, FYI. I'm not sure I want to trade ahead of that. Link to comment Share on other sites More sharing options...
KCLarkin Posted November 12, 2015 Share Posted November 12, 2015 Considering it. I'm also considering tax loss harvesting and then buying back. I sold half. May sell the rest and buy back at year-end. Link to comment Share on other sites More sharing options...
muscleman Posted November 12, 2015 Share Posted November 12, 2015 Are there anybody good at valuing life insurance companies? I felt like the way RR report earnings is more like a life-insurance company. You have long term contracts with lots of assumptions about life span and you twist the estimates a bit and get a quite different earnings number for this year. What's the best way to tackle it? Link to comment Share on other sites More sharing options...
handycap5 Posted November 12, 2015 Share Posted November 12, 2015 can people following this industry help me understand something. what is going on between the OEMs, the engine guys, the after-market, etc.? BA/AIR have very long backlogs and appear to have reasonable pricing power (though hard to tell), and this is across narrow and wide bodies. At the same time, many supply chain players seem to be having difficulty over last year: PCP, RR, WAIR, etc. This is a quote from RR CFO on the call today: In terms of the downside risk on legacy off the market portfolio is, I mean, we've modeled that and look to that as possibly as we can. But there clearly is a big transition going on both in the narrow-body and the wide-body side of the business and I think that we are not alone in experiencing this. I've seen comments from several other companies like from the airline side and the supply side within the industry over the last few weeks. And I think what we are seeing is part of a pattern and that may will change further and we got to be prepared. What is he referring to? What is happening in this business that is different than the past? Link to comment Share on other sites More sharing options...
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