Word of Caution: Boeing's Narrowbody Build Rate Is Unsustainable [View article]
Bob Will:
There was an intriguing report on the fragility of the 787 fuselage a number of years ago, as cracks that normally arise in an aluminum airframe will remain absent on the composite fuselage, making visible maintenance difficult. A segment was put together by Dan Rather in 2007-2008 on that exact topic. The 787's flight tests remain rigorous, as it nears first delivery later this year, and only time will tell on the safety of this aircraft relative to its mostly-aluminum replacement 767. Valuentum puts out some excellent research on Boeing. If interested, a subscription is very reasonable:
Certainly, Boeing's management has overpromised and underdelivered, and a lack of engineering resources has played its part in the serial delays on the aircraft. The transferring of jet-building technology across the globe has already occurred and look for China and Russia to add to Brazil and Canada as key competitors to Boeing and EADS in the narrowbody market the years ahead. The 787 has definitely cost more than Boeing had originally outlined (to the tune of billions over budget), but as deliveries ensue, inventory build should subside, helping cash flow and improving the firm's credit position.
We, at Valuentum, assign Boeing a very large margin of safety in terms of its equity value, but we don't envision a scenario in which Boeing will file bankruptcy due to the 787.
"We'll take a look at how much higher in the next article of this series."
For those interested in our valuation analysis of Morningstar including an issuer-pays model on the corporate side, please sign up to Valuentum at the following link:
Is AMR's Equity Practically Worthless? [View article]
Thanks for your thoughts Frankz. We agree that airline stocks are not long term investments. Valuentum put out a piece not too long ago on this exact subject. It can be viewed here:
Is AMR's Equity Practically Worthless? [View article]
User 3985. Thanks for you comment. The cash flow model employed is a free cash flow to the firm model, accounting for aircraft purchases as capex, which results in depreciation expense via the income statement (and a hit against cash from op's) and expenditures via investing cash flow. For sale-leaseback transactions--meaning AMR is renting these aircraft--such a transaction is captured via rent expense and hits the income statement and resulting operating cash flow. Capex is netted against these transactions. The analysis above demonstrates the high hurdle AMR must achieve in sustainable annual free cash flow to the firm (enterprise cash flow) in order for the equity to have any value at all. The free cash flow to the firm model is the most widely used model in valuing operating companies. The capitalization of operating leases and the use of the approach above result in very similar fair values for AMR, as rent expense is roughly broken down into depreciation and interest components. Capitalizing operating leases reflects the true economic substance of an operating lease (a purchase via debt and expense as a form of depreciation). Importantly, the analysis above reveals that even using a very generous discount rate of 10% (very low for an ultra-cyclical airline), AMR would need as much as $1.4 billion in annual free cash flow to the firm. If we used a higher discount rate, the annual cash-flow hurdle would be much, much higher.
Valuentum.com published some very good analysis on the airline industry. The firm's website is the following: www.valuentum.com
Republic Services: A Trash Stock Worth Picking Up [View article]
Hi Alan and Common Cents:
I think Waste Management and Republic Services are both excellent businesses and undervalued as well. Republic has a bit more capital appreciation potential, however, which is why I favor the name slightly. I've written a very short article regarding dividends in the trash industry, which can be viewed here.
Aging Fleets: Which Airline Has the Highest Costs? [View article]
"The age (and model) of an aircraft could have large implications on fuel efficiency..."
Certainly, airlines would much rather be flying a 787 Dreamliner (once it's delivered) than a legacy 767, or a 737NG than an MD-80 or 737 Classic, assuming the route density is sufficient. Aged = outdated. Engine and airframe technology has advanced considerably in the past 20 years.
Aging Fleets: Which Airline Has the Highest Costs? [View article]
For the benefit of those that may come across a320man's comment, the math is correct and is based on a weighted average fleet age. It is not a simple average as a320man suggests.
The Future of the Narrowbody Airplane Market [View article]
The Mitsubishi Regional Jet (MRJ), which seats about 70-90 passengers, fits within the regional-jet arena, the smallest market in dollar terms during the next couple decades (not the single-aisle narrowbody segment). Interestingly, the MRJ also sports Pratt & Whitney's fuel-efficient geared turbo fan. The MRJ currently has two buyers with an aggregate of 65 orders and 60 options. Japan's ANA (All Nippon), the launch customer of Boeing's 787 Dreamliner, is also the first customer of the MRJ. Look for Japan to potentially build a larger aircraft that fits within the single-aisle narrowbody segment, though the timing of this is still many, many years out. If Mitsubishi Aircraft Corp. (Mitsubishi Heavy Industries/Toyota) does decide to build a narrowbody aircraft, we'll likely see seven OEMs in this space within the next two decades. The majority of demand for a Mitsubishi narrowbody would likely come from Asia, putting another dent in narrowbody aircraft deliveries for the incumbents in that region. Another entrant in this space would only reinforce the likelihood for fewer deliveries and heightend pricing pressure on Boeing and Airbus within the narrowbody space.
LinkedIn (LNKD) bears who can't short the stock - with 65% of shares available for shorting already borrowed - can start betting against the firm with options today: "They’re going to be coming after puts, and market makers are going to be raising their offers." LNKD flat today, up 92% from offer price. [View news story]
RE: "You incorrectly state that the 737 is the most lucrative portion of Boeing's portfolio. The most lucrative aircraft in their commercial portfolio is the 777, the margins and contribution to profit is significantly higher than the 737 and is probably worth 5-10 times more per 777 than the 737. The 737 would not be a money maker unless they can maintain the production volumes in excess of 30 units per month. The same goes for Airbus A320 class aircraft."
Boeing doesn't break out contributions to profit per aircraft; however, you are correct that the 777 is more profitable per aircraft than the 737. That said, Boeing has a backlog of over 2,100 737's and less than 300 777s -- it depends on how you look at it.
RE: "...Like many things in life, timing is everything, and Bombardier's timing couldn't be any better. Look for them to offer a CS500, and look for the C-Series order book to grow fast. Really fast."
dal777, I think your opinion only reinforces the view that a structural shift in the narrowbody market will occur toward the latter part of this decade. As the article outlined, Bombardier, Comac, etc. will almost certainly be able to develop competitive planes to break up the duopoly in the years ahead. Unfortunately, we know all too well how important market share is to Boeing and Airbus. It's the cutthroat pricing (even beyond the intense discounts today) that's going to hurt all participants once this market evolves -- no exceptions.
Word of Caution: Boeing's Narrowbody Build Rate Is Unsustainable [View article]
There was an intriguing report on the fragility of the 787 fuselage a number of years ago, as cracks that normally arise in an aluminum airframe will remain absent on the composite fuselage, making visible maintenance difficult. A segment was put together by Dan Rather in 2007-2008 on that exact topic. The 787's flight tests remain rigorous, as it nears first delivery later this year, and only time will tell on the safety of this aircraft relative to its mostly-aluminum replacement 767. Valuentum puts out some excellent research on Boeing. If interested, a subscription is very reasonable:
www.valuentum.com/cate...
Certainly, Boeing's management has overpromised and underdelivered, and a lack of engineering resources has played its part in the serial delays on the aircraft. The transferring of jet-building technology across the globe has already occurred and look for China and Russia to add to Brazil and Canada as key competitors to Boeing and EADS in the narrowbody market the years ahead. The 787 has definitely cost more than Boeing had originally outlined (to the tune of billions over budget), but as deliveries ensue, inventory build should subside, helping cash flow and improving the firm's credit position.
We, at Valuentum, assign Boeing a very large margin of safety in terms of its equity value, but we don't envision a scenario in which Boeing will file bankruptcy due to the 787.
Hope this is helpful.
Kind regards,
Brian
Morningstar's Untapped Potential [View article]
For those interested in our valuation analysis of Morningstar including an issuer-pays model on the corporate side, please sign up to Valuentum at the following link:
www.valuentum.com/cate...
The new report will be published shortly.
Kind regards,
Brian
Apple Priced for Significantly Slower Growth [View article]
Apple Priced for Significantly Slower Growth [View article]
One can value Apple and use the same model template as the one in this article by clicking on the following link:
www.valuentum.com/stor...
Kind regards,
Brian
Is AMR's Equity Practically Worthless? [View article]
seekingalpha.com/artic...
Is AMR's Equity Practically Worthless? [View article]
Valuentum.com published some very good analysis on the airline industry. The firm's website is the following:
www.valuentum.com
Republic Services: A Trash Stock Worth Picking Up [View article]
I think Waste Management and Republic Services are both excellent businesses and undervalued as well. Republic has a bit more capital appreciation potential, however, which is why I favor the name slightly. I've written a very short article regarding dividends in the trash industry, which can be viewed here.
seekingalpha.com/artic...
Aging Fleets: Which Airline Has the Highest Costs? [View article]
Certainly, airlines would much rather be flying a 787 Dreamliner (once it's delivered) than a legacy 767, or a 737NG than an MD-80 or 737 Classic, assuming the route density is sufficient. Aged = outdated. Engine and airframe technology has advanced considerably in the past 20 years.
Aging Fleets: Which Airline Has the Highest Costs? [View article]
5 Reasons to Buy Ancestry.com [View article]
seekingalpha.com/artic...
A Short Thesis on Precision Castparts: Why We Believe Margins Will Decline [View article]
seekingalpha.com/artic...
The Future of the Narrowbody Airplane Market [View article]
LinkedIn (LNKD) bears who can't short the stock - with 65% of shares available for shorting already borrowed - can start betting against the firm with options today: "They’re going to be coming after puts, and market makers are going to be raising their offers." LNKD flat today, up 92% from offer price. [View news story]
seekingalpha.com/artic...
How Do You Get Bullish on LinkedIn? [View article]
seekingalpha.com/artic...
Looking Beyond Boeing's 787 Dreamliner [View article]
RE: "You incorrectly state that the 737 is the most lucrative portion of Boeing's portfolio. The most lucrative aircraft in their commercial portfolio is the 777, the margins and contribution to profit is significantly higher than the 737 and is probably worth 5-10 times more per 777 than the 737. The 737 would not be a money maker unless they can maintain the production volumes in excess of 30 units per month. The same goes for Airbus A320 class aircraft."
Boeing doesn't break out contributions to profit per aircraft; however, you are correct that the 777 is more profitable per aircraft than the 737. That said, Boeing has a backlog of over 2,100 737's and less than 300 777s -- it depends on how you look at it.
RE: "...Like many things in life, timing is everything, and Bombardier's timing couldn't be any better. Look for them to offer a CS500, and look for the C-Series order book to grow fast. Really fast."
dal777, I think your opinion only reinforces the view that a structural shift in the narrowbody market will occur toward the latter part of this decade. As the article outlined, Bombardier, Comac, etc. will almost certainly be able to develop competitive planes to break up the duopoly in the years ahead. Unfortunately, we know all too well how important market share is to Boeing and Airbus. It's the cutthroat pricing (even beyond the intense discounts today) that's going to hurt all participants once this market evolves -- no exceptions.