(By Mani) The 787 Dreamliner could propel Boeing Co. (NYSE:BA
) in to a compelling topline growth and cash flow story even against a backdrop of continued macro-economic uncertainty.
Boeing 787 is a commercial airplane and has two variants – 787-8 and 787-9. 787-8 is expected to carry 210 - 250 passengers on routes of 14,200 to 15,200 kilometers, while the 787-9 Dreamliner will carry 250 - 290 passengers on routes of 14,800 to 15,750 kilometers.
The 787 program was launched in April 2004 with a record order from Japan's All-Nippon Airways (ANA). Fifty-nine customers from six continents of the world have placed orders for 870 airplanes valued over $178 billion, making it the most successful twin-aisle launch of a new commercial airplane in Boeing's history.
Boeing, which has used composite materials to make 50 percent of the primary structure of the 787, delivered the first 787 to ANA on Sept. 25, 2011. Boeing is expected to deliver 39 787s in 2012, the midpoint of its guidance, while producing slightly more (42).
Given years of delays and disappointments, it's easy to overlook that the 787 really is a big deal. If manufacturing issues are indeed being resolved, the 787 represents the bulk of Boeing's topline growth in the years ahead. It would also raise the prospect of $20 billion plus of working capital releases over the next decade.
Investors seemed to have underestimated the prospects of 787 due to the current macro-economic jitters and a recent slowdown in new commercial aircraft orders. Only 20 commercial planes ordered since March 23. These order slowdown was conceived by some investors as an ominous sign for Boeing as the company's shares have historically traded on order trends.
"As Boeing's most important multiyear growth driver and the program arguably least vulnerable to immediate macro-economic pressures, the 787 has the potential to buoy Boeing's fundamentals and stock performance even under a scenario of spotty global economic growth," Oppenheimer analyst Yair Reiner wrote in a note to clients.
The 787 builds are now skipping a visit to the modification center suggests the biggest challenges and unknowns have been overcome. In addition, a second plane, in similarly fine shape, appears set to emerge from the production hangar only two weeks later. After many years of trials and tribulations, 787 production seem to be settling into a rhythm.
However, this doesn't mean that it's easy sailing from here. Over the next 18 months, Boeing still needs to execute three more production rate hikes to get from its current rate of 3.5 787s per month to its target rate of 10 per month. The company still needs to work down its inventory of more than 50 partially completed 787s, and it still needs to climb way down the cost curve.
However, since the out-of-sequence work and concurrent engineering have ceased, executing on the 787 program means executing against targets that can be clearly circumscribed, understood, and measured.
"By all appearance, the 787's biggest challenges and, more importantly, its key unknowns, are behind it," Reiner added.
By the end of 2012, Boeing's balance sheet is slated to hold about $24 billion of inventory related to the 787 program. Painful as that working capital buildup has been to watch, its work-down should be a significant driver of free cash flows over the coming years.
Though the 787 production could still consume approximately $4 billion of working capital in 2012, this consumption would be about $3 billion less than in 2011. By next year, production could turn cash flow neutral, ultimately becoming cash flow positive in 2014.
Another factor worth underscoring is just how critical the 787 is to Boeing's topline growth story. Given all the discussions about the aero upcycle and the planned rate hikes on the 737 and the 777, it's easy to overlook the fact that most of Boeing's growth in coming years will come from its newest plane.
"If current production plans are carried out, the 737 and the 777 will provide approximately $3 billion of year-on-year revenue growth in 2013, compared to more than $6.5 billion of growth from the 787," the analyst noted.
Meanwhile, the two older programs are expected to deliver a little over $2.5 billion of incremental revenue, compared to $5.5 billion plus sales from the 787, which carries a list price of about $194 million for the 787-8 variant and $227.8 million for the 787-9 variant.
Notably, the 787 appears relatively immune to macro-economic dislocations, especially given concerns that potentially worsening global economies could blunt commercial airplane demand.