Wednesday, September 13, 2017

Reading The Tea Leaves 787 will Go To 14 per Month

The old Star Trek episode said, "Make it so number 2". Dennis Muilenberg, Boeing's number one had long since held back the "Make It So" order. The why's of that command are as varied as one can imagine. The itemized list of things that happens with such an order from the top requires a what's in the tea leaves analysis from a solid Winging It perspective.

The first item up is future orders. Boeing knows something big is coming this way.


“We expect to add 100 airplanes to the 787 block. That will factor in to the financials and is accretive to our margins,”

Financial Definitions: "Accretive"

Image result for accretive

An accretive acquisition will increase the acquiring company's earnings per share (EPS). Accretive acquisitions tend to be favorable for the company's market price, because the price paid by the acquiring firm is lower than the boost that the new acquisition is expected to provide to the acquiring company's EPS. As a general rule, an accretive merger or acquisition occurs when the price-earnings (P/E) ratio of the acquiring firm is greater than that of the target firm.

In finance, accretion is the change in the price of a bond bought at a discount to the par value of the bond. Accretion can be thought of as the antonym of amortization.

  • YTD, the order book nets 78 units for the 787. That number is twenty-two short of the magical 1,300 unit number in the current accounting block. A 100 unit increase would suggest moving the block out to 1,400 units. Boeing is already making money for each 787 delivered while each unit contributes to the reduction of its set aside deferred costs of $27 Billion. Boeing's job one, is to eliminate the deferred cost of about $27 billion.

  • The second Item up is cash, Boeing will increase its cash inflow by two more 787 units a month when making revolutions for fourteen units a month pace. The current twelve a month pace stands at 144, 787 units a year delivered. Moving to 14 units a month suggest about 166 units delivered each year into the foreseeable future. If Boeing sells each unit for about 150 million at "deal"  prices it will add an additional $3.6 billion a year to its cash coffers. An important stockholder indicator indeed.

The third item up is Suppliers.

  • Boeing cannot announce going 14 a month without going to each supplier and gaining a commitment for every part provided will be there without delay. A big part, the jet engine, is an example. It is probably the most complex and expensive part on the 787. Both mega suppliers, Rolls Royce and GE, also have high tech suppliers stretched all over the world when it provides an engine for its customers. It seems Boeing has checked the supplier resource off its to-do list and can go 14 a month by 2019. Therefore, its seat makers are on-board by 2019.

There are many more subset items when announcing a rate increase from 12 to 14 787 production capability. The trickle down impact is big on workers, plant and equipment.

The tea leaves read in all this, that Boeing would not make this announcement from the top unless it has the orders already "bagged" even though not announced or publicly confirmed. Forecasting a demand is not a significant enough reason for increasing its production output. Something concrete has already occured while not announcing the who-what-when and where details.  Even though the close of 2017 is near and the order scramble has started for both mega air frame makers, Boeing had started earlier this year scrambling towards a robust 787 order year.