Boeing - Gliding Lower

| About: The Boeing (BA)


All-time high production rates in 2015, unsustainable in 2016.

Exceptionally high customer prepayment profile, inflating the balance sheet.

The DCF model suggests fair value of $101 per share.

Boeing (NYSE:BA) reported all-time high production rates in 2015, with total revenues ahead some 6% at $96 billion. However, revenues in 2016 are likely to be lower along, with cash flows after management unexpectedly lowered guidance. BA's balance sheet and business model remain strong, but headwinds will likely manifest in 2016 (excluding the SEC accounting probe). I see no near-term upside potential for the share price, and my DCF methodology suggests a fair value of around $101 per share.

Strong FY'15 revenues, but expect FY'16 revenues around 5% lower

Boeing's 2015 revenues of $96 billion were some 6% ahead of the previous year and represented an all-time high in production rates for the company across its divisions. Commercial Aircraft represented some 68% of revenues, with Defense, Space & Security a further 31%. Looking forward, the sustainability of such high production rates is dependent on high levels (4-5%) of aircrafts being retired, which is unlikely given the much lower jet fuel prices. Fuel efficiency is less of a positive factor in favor of new aircrafts under such a low fuel price environment. I would expect BA's 2016 revenues to be some 5% lower at around $91 billion as the oversupply in wide-bodied aircraft continues to take effect.

Customer prepayments have been exceptionally strong since 2010, a factor unlikely to continue

Looking at BA's cash flows since 2010, I believe the company's cash flows have benefited to the tune of around $5 billion per annum (and some $7 billion in 2014) due to customer prepayments on aircraft orders. Such prepayments represent advances (deposits) as well as progress payments, which provide BA with positive cash flow prior to delivering the aircraft. Looking at the 2015 accounts, however, this benefit shrank to only around $400 million and should increase slightly to around $1 billion in 2016. This still represents a sharp slowdown from previous years and highlights how this benefit has been "stolen" from future years, and thus, a "catch-up" period is probably inevitable. For example, current unearned revenue in 2010 was approximately $12 billion and has jumped to almost $25 billion in 2015.

Other cash costs also a factor

In addition to the prepayment "catch-up" issue I mention above, other factors such as tougher backlog pricing and higher pension and cash tax payments are likely to impact BA. These factors will negatively impact cash flows, keeping the share price subdued.

The DCF model suggests value of $101 per share

Using my key assumptions mentioned above and utilizing the DCF model attached, I arrive at a fair value price target of $101 per share. I would suggest staying on the sidelines until prices drop further.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.