Wednesday, July 23, 2014

Boeing's Micro Stock Market Vs The Macro Stock Market

Its not a new economic term nor is it a deal breaker when the market reflexes on real conditions. The Micro Market serves those stock market players who hang on relative stock position in the day to day market or on quarterly report, leveraging its capital inputs by moving money around on a periodic maintenance plan. The Macro investor put in substantial investment for the long haul and throws the paperwork in a safety deposit box only to read during a last will and testament reveal.

Boeing this quarter has new adjustments to its military arm, as the KC Tanker program has significant write -offs. The investor has noted, Boeing is fixed into the new military procurement program, where Boeing bears a greater portion of project risk than prior procurement programs. The have bid with a fixed price and few loop holes on the KC-46 tanker program. If Boeing errors on the side risk, they would have a better chance of winning the bid for the KC-46 Tanker project, since its built on established commercial frame, the 767. Boeing from its military side of operations brings to the plate new technology as it stuffs its airframe with a series of military applications. In this case known, as an add on risk factor. The military applications coming from Boeing, per Air Force requirements, must merge with Boeing's commercial side. This adjustment is the high risk side of the fixed cost model. Boeing just recognized a huge write-off towards that end on the KC-46 tanker project.

Blogging The Blogger Link:

Why Wall Street is fretting over Boeing’s latest report

Article Quote Below:

"RBC Capital Markets Analyst Robert Stallard offered this take: “Although the headline EPS result looks impressive, we think investors will look through this and note a couple of things. The most obvious is the tanker charge of $425 [million] —  to us it is worrying that Boeing is booking a charge of this magnitude at a relatively early stage in this long-term program, particularly given recent assurances from management that everything was going to plan.”"

Quoting an old Reagan philosophy term of "Trickle Down Economics", the government or "We the People" are 18 trillion in debt", this too trickles down to industry. The number one expense line on the federal debt is the military, hence the new world order of paying for military acquisitions completed with Fixed Cost Procurements Installations. The military can only afford 186 KC-46 without a cost over-run. That is why they chose the low ball route of existing airframes from commercial aviation. The 767 beat the A330 from Airbus in a much contentious bid war, where Boeing ultimately won. The military oversight is holding Boeing's feet to the procurement fire. The old adage, "you break it you pay for it", applies here"; The foreseeable escape clause for Boeing is if the military requires a variance from the original bid plan, then they will pay for it. Sounds reasonable. The 425 million write -off on Boeing's books comes from the KC-46 project as it adjusts its program expenditures that are greater than its bid allows. In essence, Boeing will eat cost over-runs from this point forward, unless the military wants a change order on the aircraft development. This over-run write-off is early in the program. Boeing has some pad in its own bid price, which ultimately erodes profits for the program. This lump number, is a bench mark investment point. The Micro Stock Investor is now moving its position away during this news cycle. They can make money on other stocks and they will come back when programming triggers it.

The program, however, needs a better picture of what lies ahead. It will need to assure investors that this is a stage adjustment during initiation phase of the project. The second stage which it has now entered with flight, systems, and applications testings. All sub stages with inherent high risks of failure. When the rubber meets the flight line is sometimes messy. Boeing has a lot riding on the flight line. They are doing its due diligence to mitigate risks as we speak. The only projected thoughts offered for the investor, is this 2nd phase contains the nebulous or abstract inputs from the Air Force as systems are refined. Boeing could have additional funding as it modifies what they don't like or what doesn't work as ordered. However, Boeing will foot the bill if it doesn' t perform as promised. The second case is Boeing's financial risk. The first case will be on the Air Force tab. This is the New World Ordering or Procurement Process. A dicey game is played in phase II for who pays for what. That is the real risk that lays outside of failure. Phase I was infrastructure adaptations and program installments, or the set up of the whole process under R&D's over site. Hence the 425 million US write-off that scares away the micro investors for a month.

KC-46 Risk Stages:
  • Phase I: Program Establishment and initial build (-425 million risk cost paid)
  • Phase II: Military applications and Air Force Refinements installations (Shared Risk)
  • Phase III: Testing, and Evaluation, Change Delta (70/30 Boeing/Air Force Risks)
  • Phase IV: Entry into service (Nominal risks)