BA - Boeing

[Spekulatius]

Anyone went through BA‘s 10-k with a fine comb? Interesting read - their accounts payable exceed their receivables by far and advanced billings finance their 80% of their inventory. (60% of the annual revenue. $120B in purchase obligation (probably long term supply contracts. if a major program blows up, the CFO‘s job could become very interesting quickly, it seems.

 

Looks like they can float their inventory through offloading the balance sheet to their suppliers and getting advances from their customers, which means they generate more cash flow when they ramp up. The reverse should be true when business slows down.

 

Then they use „program accounting“ as I learned from another forum, probably to smooth out earnings. All this you can buy for 22x earnings. Interesting.

 

Maybe I am über sceptical as they sure have done this for quite some time.

[Gamecock-YT]

Flawed analysis, failed oversight: How Boeing and FAA certified the suspect 737 MAX flight control system

 

https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/

 

 

Both Boeing and the FAA were informed of the specifics of this story and were asked for responses 11 days ago, before the second crash of a 737 MAX last Sunday.

[Liberty]

Sully op-ed:

 

https://www.marketwatch.com/story/capt-sully-sullenberger-where-boeing-and-the-faa-went-wrong-in-this-ugly-saga-2019-03-19

[Guest cherzeca]

isn't Boeing=J&J Tylenol?  wait it out, then assess whether discount justifies buying?

[Spekulatius]

isn't Boeing=J&J Tylenol?  wait it out, then assess whether discount justifies buying?

 

Except that BA is expensive to begin with (still trades around 20x earnings) and the potential downside scenario that’s more than a slap on the hand is nowhere priced in. If it were going for 12x earnings,  I would be all over it, but for 20x, I gladly watch this from the sidelines.

[LR1400]

Why do people hold stocks as a long term investment when there are

liquid markets for shares on a daily basis?

 

Seriously.

 

I continue to doubt buy and hold for businesses placed in an auction house.

 

 

[Liberty]

https://www.cnbc.com/2019/03/20/lion-air-boeing-737-saved-by-off-duty-pilot-a-day-before-crash-report.html

 

Yikes

[robface]

Current thoughts --> Short Boeing for simple reasons:

- Boeing's product development failed to product a competitive plane which its company was betting on

- $600Bn of orders at risk vs. market cap of about $210Bn --> PV of the $600Bn meaningful still even if a smaller portion get cancelled

- Reputational impact will shift more sales to Airbus

- Boeing's dealing of the whole situation has lacked ownership and accountability and raises questions on profits vs. safety / cutting corners

- Airbus will benefit

- Target Price $300 per share

[Liberty]

https://www.cnbc.com/2019/03/22/indonesias-garuda-canceling-its-order-for-49-boeing-737-max-jets.html

[Castanza]

Current thoughts --> Short Boeing for simple reasons:

- Boeing's product development failed to product a competitive plane which its company was betting on

- $600Bn of orders at risk vs. market cap of about $210Bn --> PV of the $600Bn meaningful still even if a smaller portion get cancelled

- Reputational impact will shift more sales to Airbus

- Boeing's dealing of the whole situation has lacked ownership and accountability and raises questions on profits vs. safety / cutting corners

- Airbus will benefit

- Target Price $300 per share

 

My question is does AirBus have the ability to absorb large amounts of orders and efficiently produce them? They are already backlogged with 7k+ planes.

 

https://www.airbus.com/aircraft/market/orders-deliveries.html

 

Boeing also has other planes. Not just the 737. Lufthansa ordered 40 787's the day after the Indonesia crash occurred.

 

https://newsroom.lufthansagroup.com/english/newsroom/lufthansa-group-orders-40-state-of-the-art-boeing-787-9-and-airbus-a350-900-long-haul-aircraft/s/8e28b9e1-a775-4fee-8ea5-391be31d4600

 

Sure companies could cancel and we undoubtedly will see come choose to do so. But is it a bit premature to assume all 600bn worth of orders are at risk? I think most companies would (especially the ones at the from of the line) would be willing to work with Boeing on this issue. The R&D team is obviously going into hyper drive to correct the issue at hand. You can also assume they are going beyond what is required to root out other potential issues.

 

These backlogs can take years to fill. I can't picture airlines jumping ship if their order is due soon. How many companies could afford to take a new number and go to the back of the line? What happens if Airbus has an issue with one of their planes in the next year or two?

 

But a short position in the near term could be profitable, especially if a few people abandon their orders.

[5xEBITDA]

Current thoughts --> Short Boeing for simple reasons:

- Boeing's product development failed to product a competitive plane which its company was betting on

- $600Bn of orders at risk vs. market cap of about $210Bn --> PV of the $600Bn meaningful still even if a smaller portion get cancelled

- Reputational impact will shift more sales to Airbus

- Boeing's dealing of the whole situation has lacked ownership and accountability and raises questions on profits vs. safety / cutting corners

- Airbus will benefit

- Target Price $300 per share

 

All that bad stuff and you think downside is less than -20%? Sign me up to go long in that case.

[Gamecock-YT]

https://www.nytimes.com/2019/03/25/business/boeing-simulation-error.html

 

In Test of Boeing Jet, Pilots Had 40 Seconds to Fix Error

 

During flight simulations recreating the problems with the doomed Lion Air plane, pilots discovered that they had less than 40 seconds to override an automated system on Boeing’s new jets and avert disaster.

 

[Spekulatius]

Current thoughts --> Short Boeing for simple reasons:

- Boeing's product development failed to product a competitive plane which its company was betting on

- $600Bn of orders at risk vs. market cap of about $210Bn --> PV of the $600Bn meaningful still even if a smaller portion get cancelled

- Reputational impact will shift more sales to Airbus

- Boeing's dealing of the whole situation has lacked ownership and accountability and raises questions on profits vs. safety / cutting corners

- Airbus will benefit

- Target Price $300 per share

 

My question is does AirBus have the ability to absorb large amounts of orders and efficiently produce them? They are already backlogged with 7k+ planes.

 

https://www.airbus.com/aircraft/market/orders-deliveries.html

 

Boeing also has other planes. Not just the 737. Lufthansa ordered 40 787's the day after the Indonesia crash occurred.

 

https://newsroom.lufthansagroup.com/english/newsroom/lufthansa-group-orders-40-state-of-the-art-boeing-787-9-and-airbus-a350-900-long-haul-aircraft/s/8e28b9e1-a775-4fee-8ea5-391be31d4600

 

Sure companies could cancel and we undoubtedly will see come choose to do so. But is it a bit premature to assume all 600bn worth of orders are at risk? I think most companies would (especially the ones at the from of the line) would be willing to work with Boeing on this issue. The R&D team is obviously going into hyper drive to correct the issue at hand. You can also assume they are going beyond what is required to root out other potential issues.

 

These backlogs can take years to fill. I can't picture airlines jumping ship if their order is due soon. How many companies could afford to take a new number and go to the back of the line? What happens if Airbus has an issue with one of their planes in the next year or two?

 

But a short position in the near term could be profitable, especially if a few people abandon their orders.

 

I don’t think Airbus has any way to replace BA in the foreseeable time. Airbus would need to more than double their capacity and the airlines have a huge vested interest in BA airplanes (supporting infrastructure, training etc) , as well as an interesting in keeping at least two suppliers. BA will remain here for the foreseeable future.

 

I could see pot. A lot of damage to BA however. The 737 max family is one of BA most important airplanes and was 256/800 planes delivered last year or about 32%. It is also a huge part of their backlog. If the reputation of this airplanes becomes tainted, then I could see airlines pulling orders, suing BA for damages etc. and BA being forced to redesign the airplane quickly, resulting in huge cost, writeoff of exist8ng inventory and probably an extra writeoff due to BA project accounting (which appears to aversg production costs over the expected life of a program). I could easily see the stock being worth less than $200/ share in a worst case scenario.

 

Another risk I see is that BA becomes a prime target for retaliation if the trade war really escalates. It’s one of the biggest US exporters, so if you want to hit back when this spirals out of control, curtailing orders to BA would be one way to do it.

 

On the other side,  China for example could be tempted to increase order just to reduce the trade deficit or show high profile goodwill (and a huge $ amount headline order) if the trade negotiations are at least somewhat successful, which I think is the more likely scenario.

[Liberty]

https://spectrum.ieee.org/aerospace/aviation/how-the-boeing-737-max-disaster-looks-to-a-software-developer

[bobp]

Great article. Scary.

""the nacelles will cause the 737 Max at a high angle of attack to go to a higher angle of attack. This is aerodynamic malpractice of the worst kind....

An airplane approaching an aerodynamic stall cannot, under any circumstances, have a tendency to go further into the stall. This is called “dynamic instability,” and the only airplanes that exhibit that characteristic—fighter jets—are also fitted with ejection seats."

 

Sounds like Boeing chose a software fix rather than ejection seats.

 

https://spectrum.ieee.org/aerospace/aviation/how-the-boeing-737-max-disaster-looks-to-a-software-developer

[Liberty]

Interview with a Boeing whistleblower who talks about cultural issues at the company that could affect safety:

 

https://www.nytimes.com/2019/04/23/podcasts/the-daily/boeing-dreamliner-charleston.html

[IceCreamMan]

Why Airbus isn't pouncing on Boeing's 737 MAX turmoil

 

https://www.reuters.com/article/us-airbus-boeing-strategy-analysis/why-airbus-isnt-pouncing-on-boeings-737-max-turmoil-idUSKCN1S51SI

[Spekulatius]

I heard some interesting commentary regarding BA in Tobias Carlisle podcast (around the 30min mark)

https://podcasts.apple.com/us/podcast/the-acquirers-podcast/id1454112457?i=1000445957238

 

It’s mentioned specifically as a company that is underinvesting and trying to manage the stock price, apparently to a magic $800 number. It’s interesting because I had the same feeling when I reviewed Boeing a while ago, and now the 737max disaster sort of may be indirectly caused by this. I wouldn’t touch the stock above $200 personally.

[jschembs]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


[Jurgis]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

Great article. But unfortunately it won't change a thing. Companies will continue to cut corners. Investors will continue to invest.

[Spekulatius]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

Great article. But unfortunately it won't change a thing. Companies will continue to cut corners. Investors will continue to invest.

 

It’s where Uncle Sam would need to come in, start a criminal investigation into management and the engineering practices and threaten to get some arses thrown into jail for gross negligence and manslaughter. It probably won’t happen, these guys have very good lobbyists, but it’s about the only way these things would change for sure.

[Liberty]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

I haven't read the article, but based on that quote, the premise seems to be false. This seems to equate engineering and innovation with big step changes. These are rare, and most of innovation and engineering has always been more iterative and incremental. Some look down on that, but that's where a lot of progress comes from, and the problems can be just as hard as anything out there even if the results aren't always as flashy. People overrated novelty, and underrate making stuff just better and cheaper and more efficient and scale...

[dwy000]

And Boeing doesn't even make the jet engine, those are supplied by GE and Rolls Royce (mostly).  They basically make aluminum tubes.

 

The next innovation will be hybrid electric powered flights.

[Spekulatius]

And Boeing doesn't even make the jet engine, those are supplied by GE and Rolls Royce (mostly).  They basically make aluminum tubes.

 

The next innovation will be hybrid electric powered flights.

 

Boeing is basically an airplane system manufacturer and they will get a lot of components (engines, electronics, even the airframes) elsewhere. Liberty is correct, most of the progress is improving things over and over, not reinventing them. Tremendous progress with materials (composites, single crystal engine turbine blades, electronics have made flying cheaper, safer and more energy efficient. Only and idiot would say it’s all generic.

[jschembs]

https://newrepublic.com/article/154944/boeing-737-max-investigation-indonesia-lion-air-ethiopian-airlines-managerial-revolution

 

Money quote:

You are in a mature industry that is no longer innovative; it’s a commodity business. The last great innovation capable of driving major growth in aviation was the jet engine back in the 1950s, and every technological advance since has been incremental. And so the emphasis of the business is going to switch away from engineering and toward supply-chain management. Because every mature company has to isolate which parts of its business add value, and delegate the more commoditylike things to the supply chain. The more you look to the market for pricing signals, the more the role of the engineer will shrink.


 

I haven't read the article, but based on that quote, the premise seems to be false. This seems to equate engineering and innovation with big step changes. These are rare, and most of innovation and engineering has always been more iterative and incremental. Some look down on that, but that's where a lot of progress comes from, and the problems can be just as hard as anything out there even if the results aren't always as flashy. People overrated novelty, and underrate making stuff just better and cheaper and more efficient and scale...

 

I think the point of the quote is that as management / ownership views engineering as more of a cost center and less of a source of revenue growth, they begin to minimize the importance and capital allocated to engineering, focusing instead on minimizing costs throughout the value chain to improve profitability.