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The last week was a busy one for Boeing (BA)'s management, as Ray Conner, a talented salesman, was promoted, and was made the head of the commercial plane unit. Last Thursday, on July 5, the firm announced that deliveries of commercial planes for the quarter had risen by 32% (118 to 150 planes), as compared to the same quarter last year. This news was welcomed by investors, who were slightly doubtful of the firm's operating and financial ability to meet the unexpected rise in forecasted demand of planes till 2030, a pronouncement made only a week back in Boeing's Current Market Outlook of 2012.

The firm also announced that it anticipates to secure big orders for one of its planes - 737 MAX - in the Farnborough International Air show, the year's biggest air show. The MAX series is the successor of the 737 Next Generation family, and are much more fuel efficient and environmentally friendly.

Conner has a few problems to handle, and how he handles them will ultimately determine the performance of the stock:

  • How to capitalize from the air show this week in order to win some orders for the 737 MAX so that it can catch up with the demand of the A320 neo, a product of Airbus.
  • How to quickly upgrade the aging 777- mini jumbo - one of the most successful planes of the firm and 787-wide body plane.
  • How to win the $4-5 billion worth order from the Istanbul-based Pegasus Airlines.
  • How to increase the production capacity, and adjust the supply chain accordingly, in light of the recent announcement of increased forecasted demand from 33,500 to 34,000 commercial planes till 2030.

Airshow and 737-MAX

The firm is depending on the air show this week to meet their target of firming orders of 1,000 737-MAX till the end of this year. Only 451 units of this new fuel efficient model have been sold up till now since its launch in August last year. Boeing is already considerably behind its archrival, as 1,400 units of MAX's match-Airbus' A320 neo have already been sold this year. With the presence of big buyers like Air Lease Corp and American Airlines in the show, and a strong product to offer, Boeing is expected to pull off large orders.

Estimating the revenue coming from the new orders is as follows:

*Qineqt's Estimate

**Zero discounts have been assumed

** Price/Sales ratio used is ttm

Following reasons are responsible for Airbus beating Boeing in this challenge:

  • Airbus introduced the A320 neo in 2010, well before Boeing introduced its MAX series on August 30, 2011. This also means that the A320 neo will be delivered much before the MAX series. From yesterday, Airbus has already initiated the production of this fuel efficient plane and expects to deliver it by 2015. Boeing, however, will start the production in 2015 and deliver the planes by 2017.
  • After a complex calculation, it was estimated that the A320 neo provided 2.07% more fuel efficiency than the 737-MAX series. Despite the A320 neo's average price being $5 million more than the MAX series, airlines, in light of rising fuel prices, are willing to pay more for better fuel efficiency.
  • The following diagram shows the comparison of the Airbus neo series and Boeing's MAX series:


(Click to enlarge)

Source

The above figure from the Airbus website claims that the A-320 neo is much more cost efficient than the 737 series.

However, experts anticipate that Boeing has got a strong product to offer, and will therefore catch up on the orders of the A320 neo after this show. However, one thing is to be kept in mind, despite the increasing demand from Asia-Pacific, Europe is going through financial hard times, and therefore, demand may not be as much as expected.

777 and 787-10 Replacement

Two weeks back, the firm held a two-day conference, to discuss the changes that should be brought in the 777, with its customers including Emirate Inc. and Air Lease. However, Boeing has given no hint as to when exactly it will decide on the changes, or which of the recommendations of the customers it has approved. Some say the firm wants to assess what problems the customers are facing, with a similar jet - namely the Airbus A350-1000 - which has shown disappointing sales since its launch, and then update its product accordingly.

The firm plans to fly the 787-10 in the air show at Farnborough. However, nothing has been finalized as yet.

Order from Pegasus Airlines

The Istanbul-based Pegasus Airlines is a budget carrier and has remained Boeing's customer for some time. However, Airbus has tried to snatch the airline's recent order of 40-50 jets worth $4-5 billion from Boeing, in what seems to be an intense price war. According to Pegasus Airlines, nothing has been finalized as yet.

Production Capacity till 2030

The firm claims that it will be easy for their suppliers to adjust according to the rise in demand. The article quoted:

"We are working very closely with our suppliers to make sure they are ready for a 30% production increase by 2014," said Mr. Tinseth (VP marketing, Boeing Commercial Airplanes, Seattle)

The news regarding the rise in deliveries this quarter indicates that the firm is determined to overcome this potential gap between demand and supply.

The figure shows the firm's plans to increase its production:

With the increase in production rate, the firm will ensure that the order fulfillment time is reduced which can lead to a satisfied and loyal customer.

Valuations

According to sell-side analysts, earnings are expected to decline this year. However, a lot depends on the firm's performance in this week's show. A successful air show will force sell-side analysts to revise the estimates upwards. In this context, the earnings announcement on July 26, 2012 will prove to be an important catalyst for the stock price.

Trading at a forward multiple of 13x, the earnings analysis shows that after a decline of EPS (from a $5.75-ttm to $4.6 in 2012) the firm's earnings will grow at 10%.

Future Catalysts

  • Boeing is able to win orders from Pegasus Airlines.
  • New 737-MAX series orders at the air show.
  • Earnings Release on July 26, 2012.
  • Release of 787-10 specifications.
  • Measures taken by firm to increase production.
Source: Air Show Could Mark Turnaround For Boeing