Monday, February 8, 2016

Boeing's 787 Has Become A Cash Positive Cow

The 787 has a long history of costs, development setbacks and glitching. Those principal contributors have been set into one big pot called deferred costs. The pot is the scraps on the production floor which account for about $28 Billion not yet paid for in the program. The good news is Boeing has turned the long sought for corner where each 787 delivered starts paying for the $28 Billion scrap heap of program expenses.

Seeking Alpha Quote: "The biggest thing that Boeing has going for it is its technical superiority over Airbus (OTCPK:EADSY) that was developed on the 787 and will be used on future aircraft. The 787 plane is opening new direct point to point routes each month with the latest being Dubai to Panama city in 17:35 hours."

An important statement coming from financial heads concerning aviation. Boeing is turning on the 787 production engine of surplus cash. Each 787 forward from December 2015 contributes to the reduction of deferred costs from the program. In accounting its called a "Contribution Margin"(CM). The CM is used in breakeven formulation. Accounting heads look at variable cost, fixed cost and Contribution margins in order to find when the next unit produced will finally make a profit. The CM is used to pay down the 787 deferred cost of $28.5 Billion.

The next question comes from determining how many units are needed from this point forward in order  to reach a profit. Some have affixed 1300 787 are needed for that to occur. If true then Boeing needs to deliver another 1,000 787s. The have about 771 in backlog. However, going forward to be built would require another 300 gross numbers or so of 787 orders in order to make a profit based on price book numbers.

The good news is they have about five years to get it done! The order book will increase by 300 in about five years assuring the 787 program will be profitable. This indicates a stock buy from this point until large orders may occur. Any large orders place will make a Boeing stock more valuable in the future, and for Stock investors it is worthy to monitor the order book in light of the booked orders measured against a unit break-even point. Making the deferred cost no longer an item of concern.