(B)(N) BA Boeing Company & Friends
Deal Book. We’re disturbed by the intensity of the competition for new sales by the major airplane developers and manufacturers (Reuters, June 20, 2013, New regional jet duo squeezes Bombardier out).
Flight Deck
Courtesy: Airbus 380
Are they any better than the intensity, and the propensity for failure and recall, of the competition for well-engineered new cars, vehicles that don’t weigh 200 tonnes when empty, and are not expected to carry two hundred passengers at 30,000 feet and 600 miles per hour, and take-off and land 20,000 times at 200 hundred miles per hour in their life span?
Passenger Deck – Economy Class
Courtesy: Airbus 380
Pilots say that flying them is as easy as riding a bicycle. OK, so here, hop on the flight deck, take the controls and fly me at $200 million a pop.
Only four companies produce these airplanes, and it’s a “peanuts” industry compared to the amount of money that is daily dealt with in the capital markets. We could afford to fund these aircraft as if they were governments – please, take what you need but give us safety and give us old-fashioned comfort, for us and our families, even in the economy class, which is cheaper than driving, and we’ll pay more if we have to. We will.
Used Aircraft In Their Retirement Seats Row A-0
We’re not suggesting, of course, that these companies become a government division – that would be a disaster – but rather that they charge more, take all the time that’s needed to create a truly wondrous craft that never fails, for any reason, a miracle, so to speak, and stop competing on price as if they were the Wal-Mart® of transportation, purporting to fly us as rich people do.
So, we looked at the business of flying from the point of view of the producers of flying. We already know about the fortunes of the flyers (USA Today, June 9, 2013, Bankruptcy judge sets vote date for AA’s turnaround plan) although some are turning a profit that is well-earned and not just on the piggy-backs. Don’t be driven from the back seats. Drive. You are the only ones that can.
What we found is an industry with a current market value of $139 billion (in total) that is expected to pay a dividend of $2.3 billion this year for a current yield of 1.7%.
In contrast, the flying public spent $490 billion at the Wal-Mart store last year, and the current market value of Wal-Mart is $241 billion, and the expected dividend is $6.2 billion for a current yield of 2.5%.
Does that suggest that something might be wrong with the aircraft industry that only had sales of $180 billion last year, up from $90 billion in 2008?
Moreover, Wal-Mart carries an inventory of about $44 billion which is comparable to only half of your current inventory of $81 billion that is being financed by $223 billion of debt which is nearly twice Wal-Mart’s debt of $127 billion. In our view, the aircraft industry is the dog. Charge more and pass on your costs to the tail.
Exhibit 1: (B)(N) Boeing Company – Risk Price Chart
(B)(N) BA Boeing Company – June 20, 2013
Boeing Company designs, develops, manufactures, sells and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services.
(Please Click on the Chart to make it larger if required.)
From the Company: The Boeing Company, together with its subsidiaries, engages in the design, development, manufacture, sale, and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. The company operates through five segments: Commercial Airplanes, Boeing Military Aircraft (BMA), Network & Space Systems (N&SS), Global Services & Support (GS&S), and Boeing Capital (BCC). The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements, as well as provides related support services to the commercial airline industry. It also offers aviation services support, aircraft modifications, spares, training, maintenance documents, and technical advice to commercial and government customers. The BMA segment engages in the research, development, production, and modification of manned and unmanned military aircraft and weapons systems for the global strike, global mobility, and airborne surveillance and reconnaissance markets, as well as provides related services. The N&SS segment is involved in the research, development, production, and modification of electronics and information systems; strategic missile and defense systems; space and intelligence systems; and space exploration products. The GS&S segment offers integrated logistics, including supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services, such as pilot and maintenance training. The BCC segment facilitates, arranges, structures, and provides financing solutions for its commercial airplanes customers. Its financing portfolio consists of equipment under operating leases, finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The Boeing Company was founded in 1916, has 175,000 employees, and is based in Chicago, Illinois.
Exhibit 2: (B)(N) EADSF European Aeronautic Defence and Space Company N.V. (ADR)
(B)(N) EADSF European Aeronautic Defence and Space Company (ADR)
European Aeronautic Defence and Space Company N .V. manufactures commercial aircrafts, civil helicopters,commercial space launch vehicles, missiles,military aircraft, satellites, defense systems & defense electronics, and services related to these activities.
(Please Click on the Chart to make it larger if required.)
From the Company: The EADS Group is a global leader in aerospace, defence and related services, employing around 133,000 people at more than 170 sites worldwide. EADS includes Airbus as the leading global manufacturer of the most innovative commercial and military aircraft, with Airbus Military covering tanker, transport and mission aircraft. Astrium, the European leader in space programmes and the third biggest space provider worldwide, is active in all space activities, from large-scale space systems to satellite services. Cassidian, worldwide leader in state-of-the-art solutions for armed forces and civil security worldwide, also makes EADS the major partner in the Eurofighter consortium and a stakeholder in the missile systems provider MBDA. Eurocopter is the world’s primary helicopter manufacturer in the civil sector, offering the largest civil and military helicopter range in the world
Exhibit 3: (B)(N) Embraer S/A – Risk Price Chart
(B)(N) ERJ Embraer SA
Embraer S.A. is an aerospace company manufacturing commercial, executive, defense and agricultural aircrafts. The Company also provides maintenance and repair services and markets spare parts to its jets.
(Please Click on the Chart to make it larger if required.)
From the Company: Embraer S.A. primarily develops, produces, and sells jet and turboprop aircrafts for civil and defense aviation markets in Brazil, North America, Latin America, the Asia Pacific, Europe, and internationally. It also offers aircrafts for agricultural use, structural components, mechanical and hydraulic systems, aviation services, and technical activities related to the production and maintenance of aerospace material. In addition, the company designs, develops, and manufactures various commercial aircrafts for regional, low-cost, and mainline airlines; and develops a line of executive jets for fractional ownership companies, charter and air-taxi companies, and high-net-worth individuals, as well as offers after-sales customer support services, such as sales, inventory pooling programs, MRO services, customer training, and other product support. Further, it provides a range of integrated solutions for the defense and security market, including training/light attack, military transport, and government transport aircrafts; aerial surveillance platforms; command, control, communications, computer, intelligence, surveillance, and reconnaissance systems; maintenance and material solutions; and contractor logistic support programs. Additionally, the company manufactures general aviation propeller aircrafts, such as executive planes and crop dusters; and landing gear, fuel systems, and fuel tanks, as well as offers structural parts, and mechanical and hydraulic systems for the production of helicopters. It has strategic alliances with European Aerospace and Defense Group, AEL Sistemas, Boeing, and AVIC. The company was formerly known as Embraer-Empresa Brasileira de Aeronáutica S.A. and changed its name to Embraer S.A. in November 2010. Embraer S.A. was founded in 1969, has 18,000 employees, and is headquartered in São José dos Campos, Brazil.
Exhibit 4: (B)(N) BBD-B Bombardier Incorporated – Risk Price Chart
(B)(N) BBD-B Bombardier Incorporated – June 20, 2013
Bombardier Incorporated manufactures transportation equipment. The Company operates in two segments, Bombardier Aerospace and Bombardier Transportation.
(Please Click on the Chart to make it larger if required.)
From the Company: Bombardier Incorporated manufactures and sells transportation equipment worldwide. It operates in two segments, Bombardier Aerospace and Bombardier Transportation. The Bombardier Aerospace segment designs, manufactures, and supports aviation products comprising business aircrafts; commercial aircrafts, including regional jets, turboprops, and single-aisle mainline jets; and specialized and amphibious aircrafts. This segment also offers aircraft parts, maintenance, and training services; and online services, as well as Flexjet fractional ownership and flight entitlement programs. TheBombardier Transportation segment designs, manufactures, and supports rail equipment and systems, offering a range of passenger railcars, locomotives, light rail vehicles, and automated people movers. It also provides bogies, electric propulsion, control equipment, and maintenance services, as well as rail transportation systems and rail control solutions. Bombardier Inc. was founded in 1942 and has 64,000 employees and is headquartered in Montreal, Canada.
The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2006) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.
Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.
To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.
Postscript
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