Record 787 Dreamliner Sales Could Drive Boeing Stock Higher In 2016

  • A Boeing Dreamliner analyst has said that Boeing will set a new production record for 787 aircraft in 2016.
  • Specifically Boeing will produce high-margin models in much higher volumes than their lower margin counterparts.
  • This might help to take Boeing closer to its mission to finally sell 787 aircraft profitably.

Boeing (NYSE:BA) 787 Dreamliner has been hailed as the most revolutionary aircraft built since the 747. The ability of the aircraft to fly non-stop for long periods has enabled airlines to create new routes and improve operational efficiency considerably. But revolutionary as it might be, creating the 787 has come at huge cost for Boeing. The giant aircraft manufacturer has sunk more than $32 billion in development costs into the 787 project, about $10 billion more than Boeing had projected about two years ago. Hence, despite four years of commercial production, Boeing is yet to record a profit on the model. In fact a cross-section of analysts have all along expressed their reservations as to whether 787 will ever be profitable for Boeing.

But these fears might prove to be unfounded after all. A cross-section of analysts are more sanguine that the aircraft will eventually become profitable, and estimate that Boeing will lose $80 million for the first 350 or so Dreamiliners sold, before breaking even and finally becoming profitable. Boeing lost ‘‘only’’$25 million on every Dreamliner sold during the last quarter which suggests that its losses could be coming down. Boeing has sold more than 300 Dreamliners already, which means it might not be that far from achieving profitability on the model.

In fact Boeing has projected that it will record the first profit on 787 towards the end of the current year. The company’s third quarter results seem to support this sentiment by the company. Boeing is usually judged heavily on its free cash flow. During the third quarter, Boeing’s free cash flow jumped from $317 million during the previous year’s comparable quarter to $2.3 billion, which the company pinned on lower capex.

Even assuming Boeing’s predictions are overly optimistic and the company will not be able to sell the model profitably this year, there are other indications that profitability might not be far off. Uresh Seth, an avid Dreamliner analyst, says that Boeing is on course to set another record when it sells 140 Dreamliner jets in 2016. The record production will reflect Boeing’s shift from the current 10 planes per month to 12.

Boeing will begin production of the first 787-10 models, the largest of the three 787 models, in 2016. Meanwhile, Boeing will produce many more 787-9s than 787-8s by a factor of 3:1, with Seth saying that Boeing will produce 102 787-9s compared to just 38 787-8s during the year. The bigger models have a significantly higher revenue without a whole lot of incremental costs. Boeing says 787-9s and 787-10s only cost 5% more to build than 787-8s, but fetch 20% to 40% higher revenues. The model shift to larger planes therefore improves gross margins--in fact Boeing predicts that it will eventually be able to realize a profit of $50 million for every 787 sold, which implies a profit margin of about 30% compared to 20% to 25% for older models such as 737 and 777.

Accounting writeoff

It might, however, take considerably longer for Boeing to completely offset the $32 billion mountain of cumulative 787 deferred costs. Some analysts predict that Boeing will have to sell at least 1300 787s to offset those costs, or~ 1,000 more than what it has sold already, which at current production rates suggest it might take the company at least 8 years. The biggest risk for Boeing stock in the future is that the company might fail to realize the projected cost savings and the desired profitability on its 787 project, and decide to undertake a multibillion-dollar forward loss accounting write-off. Such an action would likely leave Boeing in a profit hole for years, which would certainly damage Boeing stock. Investors should therefore keep a close eye on how this scenario unfolds. But current indications are that Boeing might actually succeed in its mission to turn a profit on its Dreamliner.

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