Boeing Co released figures on Tuesday that only 380 aircraft were delivered in 2019, compared with 863 delivered by rival Airbus. Among them, the cancellation of commercial aircraft orders exceeds the purchase volume, so people begin to worry, has Boeing Co fallen off the altar since then?

Last week, there were rumors that Buffett's Berkshire Hathaway began to build a position in Boeing Co, although the news can not be confirmed, but it is really in line with Buffett's investment style, a company with a deep moat is in all kinds of trouble.

Now that Boeing Co is in trouble, is it time to pick up bargains?

1.Commercial aircraft is the pillar of Boeing Co

For more than 40 years, Boeing Co has been the world's leading manufacturer of civil aircraft and a global market leader in the fields of military aircraft, satellites, missile defense, human space flight and carrier rocket launch.

Boeing Co's main business includes three parts: commercial aircraft, Boeing Co's defense, space and security business, and global services. Among them, Global Service is a new business in 2016.These four businesses contributed a total of $101.127 billion in revenue in 2018, with a net profit of $10.46 billion and a net interest rate of 10.3%.
Boeing Co earned $59.37 billion from commercial aircraft sales in 2018, accounting for 63.37 per cent of Boeing's total revenue.

On the profit side, commercial aircraft accounted for 65 per cent of operating profit, or $7.879 billion.

It can be said that Boeing Co is still a company that makes a living by selling commercial aircraft, which is the main source of Boeing Co's revenue and profits. If something goes wrong with this business, the whole company will be in trouble.

At present, Boeing Co's main models are 737 (narrow-body aircraft), 777 (wide-body aircraft) and 787 (ultra-wide-body aircraft).

Boeing Co needs a lot of time and capital to develop a new type of aircraft. The time from order acceptance to actual delivery is long, and the following figure shows the time required from order acceptance to formal delivery. The 737 took 6-8 years, the 787 took 5 years, and the 777X is expected to be delivered in 2020.

As of September 30, 2019, Boeing Co still had 5488 aircraft outstanding, valued at US $387 billion.This makes Boeing Co's revenue quality extremely high, predictability is very strong.

The 737 is currently Boeing Co's best-selling model, with undelivered orders as high as 4406. Assuming that the future production capacity reaches 57 aircraft per month, the number of orders will remain unchanged, and it will take 6.4 years to digest these orders.Boeing Co's income from selling a 737 aircraft is about $100m to $134 million, with a cash profit margin of about 25-30 per cent.

The 787 is the second-best-selling model, with 529 outstanding orders, but production capacity is expected to fall from 14 to 12 per month in 2020, lasting about 3.7 years.The official price is between $248 million and $338 million. After more than a decade of losses, the cash profit margin can reach about 30%, but capacity is expected to decline this year.

The 777 series is in the process of upgrading, the original production capacity of the 777 has been reduced to 5 aircraft per month, and 85 777 have not yet been delivered. The 777 is replaced by 777X, which has received orders for 529 aircraft, and the company is expected to start delivery this year.But Goldman Sachs Group expects the 777X series to break even with free cash flow until 2022.

Thus it can be seen that at present, Boeing Co mainly makes money from 787s and 737s, of which 737 account for 80 per cent of the total orders in the future.

2.737 grounded and its influence on Boeing Co

How great is the impact of the 737MAX accident on Boeing Co?

Boeing Co's share price rose rapidly in early 2019, rising 40% in two months, far outpacing the s & p 500 and hitting an all-time high of $438. This is mainly because the increase in the production capacity of the ultra-wide passenger aircraft 787 in the past two years has led to a rise in the operating interest rate of the overall passenger aircraft business, while the huge global demand for narrow-body aircraft has helped Boeing Co book revenue and cash flow for the next seven years.

But the good times didn't last long. On March 10, 2019, Boeing Co had the worst plane accident in recent years. An Ethiopian Airlines Boeing Co 737MAX8 crashed, leaving no one on board. Events have been simmering since then. On March 13, all international aircraft owning Boeing 737MAX aircraft have been grounded.

On May 14, the Wall Street Journal reported that the 737MAX may have caused an accident due to a software defect, but then Boeing Co discovered other defects other than the software, including a flaw in the trimming wheel of the simulator and a defect in the flight control processor in the scene simulation, which further delayed the plane's return flight.

During the period from March to December, although 737MAX was grounded, Boeing Co did not stop production. Boeing Co originally planned to produce 52 737 aircraft a month, but it was changed to 42 a month after the accident.

This effect is particularly evident in the income statement and the cash flow statement. In the first three quarters of 2019, Boeing Co's delivery of aircraft fell 47 per cent from a year earlier to 301. Commercial aircraft revenue fell 39 per cent year-on-year to $24.793 billion. Operating margin fell directly from positive 12.8% to-15.4%.

According to the cash flow statement, Boeing Co's operating cash flow in the first three quarters of 2019 was-$226 million, compared with $12.375 billion in the same period last year, a decline that seems frightening, but a closer analysis shows that it is mainly due to a sharp increase in inventory to $9.5 billion.

Inventory is the most common current asset. When Boeing builds an aircraft, it needs to buy materials in advance and pay the wages of its production staff. these expenses have actually flowed out of the company in the form of cash, but because the aircraft has not been delivered, the income cannot be recognized, resulting in a big increase in inventory. the net change in working capital is negative, and the short-term capital consumption of enterprises increases.

Even so, Boeing Co's share price has fallen by only 26% from its peak to trough in 2019. Because Boeing Co has been keeping the production of 737MAX, as long as the relevant departments give permission to resume flight in a few months, the accumulated inventory will be delivered in the next few quarters, and the production capacity will gradually return to normal. So the total amount of revenue and cash flow does not change much, it is just recorded at another point in time.

However, on December 16th, Boeing Co announced that it would suspend the production of 737MAX airliners from January 2020.

The impact of the shutdown may be greater than expected. Because the capacity of the Boeing 737 is limited, even if delivery resumes in the future, it will take a long time to make up for the loss caused by the shutdown.

The production capacity of 737MAX was 52 before the accident and 42 after the accident. Assuming that the suspension of production for three months is equivalent to 126 fewer aircraft, even if it is produced at a rate of 57 per cent in the future, it will only produce five more aircraft than normal, and it will take two years to digest the impact of the three-month shutdown.

According to the Barclays report, Boeing Co had a net free cash inflow of about $13.7 billion (excluding R & D and 777X manufacturing costs) in 2018. The 737 series (including 737MAX and 737NG) contributed $7.5 billion, 787 contributed 4.5 billion, 777 contributed 1.4 billion, and defense and global services operations contributed 4.5 billion.

Before the accident, Barclay thought that 737MAX could contribute 8.7 billion of Boeing Co's free cash flow in 2020, accounting for about 50% of the total free cash flow.
At present, Wall Street mainly uses free cash flow to value Boeing Co. If Boeing Co really stops production of 737MAX indefinitely in the future, it will be equivalent to losing more than half of his free cash flow, and Boeing Co's share price may also fall by more than half.

3.Two core issues in the future

At present, the market predicts that the 737MAX will be able to fly again. Under this condition, Boeing Co's future free cash flow will be determined by two factors:How long will the production stop and how much can be achieved after the resumption of flight?

The first step for 737MAX to resume production is to get FAA's re-flight permit (Recertification). There are four main steps:

First, conduct an evaluation with FAA to ensure that the system software runs smoothly

Second, airline pilots conduct flight simulations to evaluate various human factors and flight conditions.

3. FAA pilots conduct flight verification and simulation of the final updated software. After passing, Boeing will submit the final software version to FAA for review.

4. JOEB conducted multi-day simulations and tests with global regulators and airline pilots to verify the training requirements. After the meeting, the Flight Standardization Committee will issue a report to consult the public before finally approving the training.

At present, the first project has been completed and has entered the stage of airline pilot simulation test, but the remaining specific timetable is not clear.

At present, Wall Street has a good understanding of the suspension of 737 production, and has incorporated most of the factors (737 production suspension for half a year, 787 production capacity decline, 777X delayed delivery) into Boeing Co's free cash flow model, with a target price of about $300,330.

Goldman Sachs Group expects to get a re-flying license in April and resume delivery in July. The initial production capacity was 47 aircraft per month, the Q1 recovered to 52 aircraft per month in 2021, and the Q3 reached 57 aircraft in 2021. They set a target price of $301, while Goldman Sachs Group offered a lower price because they included the suspension of share buybacks due to cash flow damage.

Barcalys expects Boeing Co to resume delivery of Q2 by the end of 2020, with an initial production capacity of 42 aircraft per month and 57 Q4 aircraft by 2021.

In the short term, Boeing Co's share price fluctuations will revolve around the news.There will be two important meetings in the future. The company will release its fourth-quarter results on January 29th, and the shareholders' meeting will be held at the end of April and the beginning of May, when Boeing Co will announce more news about the resumption of flights and production capacity.

The longer the shutdown, the greater the impact on free cash flow, and share prices are likely to fall further. Because from 2010 to 2018, the stock price basically followed the free cash flow. During this period, Boeing Co's free cash flow has increased by 905%, and the stock price has risen by 658%.

In the long run, the accident may be a small setback in Boeing Co's history.

first,The growth prospect of the commercial aircraft market is still huge, with the demand for commercial aircraft reaching 44000 in the next 20 years.

Second,The barriers to entry in the aircraft manufacturing industry are so high that for the time being, only Boeing Co and Airbus in the world are capable of building aircraft. it usually takes eight to 10 years to build and develop a new aircraft, costing more than $8 billion. So in terms of technology and capital, Boeing Co and Airbus have a deep moat.

Third,Under normal circumstances, Boeing Co and Airbus deliver a total of about 1600 aircraft a year, half of each. After Boeing Co had a problem, everyone thought that Airbus could swallow Boeing Co's market share. But increasing production capacity is difficult to achieve in the short term, and Airbus's current capacity is not enough to meet the growing demand.

FourthBoeing Co is the symbol of American manufacturing. Boeing Co's 737Max crisis may affect US GDP0.5%, while the US economy is growing at only 2.5 per cent a year. Boeing Co works with 13000 suppliers to build an aircraft, which is one of the largest and most complex industrial supply chains in the world. Under the premise that Trump has been advocating the revitalization of manufacturing, the possibility of Boeing Co collapsing is slim.

As of January 15, Boeing Co's share price was US $332, with a market capitalization of US $187 billion. It has $10.9 billion in cash and $24.7 billion in long-term debt, including $5.5 billion in recent new financing. The free cash flow of the company will be affected by about 50% in the future, and the stock price will only fall by 20% from the high level, which shows that the discount given by the market is not big.

All the great companies in history have a strong ability to correct mistakes. There is a good chance that Boeing Co will survive the crisis, and the key question is how long it will take. Judging from the current news, there are still many uncertain factors, and half a year may not be enough to solve the problem. But the longer the crisis takes, the more frightened the market becomes, and share prices continue to fall, and that is the time for greed.

So now you might as well go to the airport Checkin, wait in the waiting room and wait for the opportunity to get on the plane.