Chart by author. Information source: Boeing.
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That chart showsThe Boeing Co.'s value of its current backlog of orders, which is roughly five times the size of its estimated 2015 sales. That's ridiculous, and it's an amount of revenue transparency few, if any, companies can offer investors looking for a lower-risk long-term investment. And, in the short term, the aircraft maker can cash in on that enormousbacklog of unfilled orders (thus increasing its cash flow and profitability) by accelerating production.
The best way to do that is with its 737, which is easily its best-selling airplane and a huge cash cow for the company. That's Boeing's plan: The company intends to have bumped production by nearly 25% by 2018. However, there's more to this situation than meets the eye, and Boeing's last such effort didn't end well.
First things first
To better understand why accelerating production of the 737 makes sense,consider this: At the end of April,Boeing had4,201 unfilled orders for the 737, which dwarfs the combined unfilled orders for the 747 (33 units in total), 767 (42), 777 (556), and 787 (835). In other words, the 737 comprises nearly 75% of Boeing's backlog.
So, it's easy to see the business sensein Boeing's plan to accelerate production of the 737 from 42 airplanes per month currently to 52 by the end of 2018. But here's the kicker: Boeing is simultaneously shifting toward its 737 MAX, a newer and more fuel-efficient model.
Has Boeing learned from its mistakes?
Boeing last attempted such a production acceleration while shifting to a new 747 model in 1997, according to Reuters. But as the company's supply chain turned into a bottleneck, the situation turned sour. Boeing even had to stop assembly on the 747 for a period of time and delay building a new version of the cash-cow 737 for several weeks -- a very costly speed bump, to say the least.
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"When I think about the mistakes we made back then, we didn't have an integrated plan that included the supply chain," Boeing production chief Pat Shanahan told Reuters, noting that the company now follows such a plan.
While accelerating production can create problems that disrupt output and thus deliveries, the flip side isn't any better. Consider that while Boeing and Airbus practically form a duopoly in the manufacturing of larger commercial aircraft, both face more competition from small competitors in single-aisle aircraft, where the 737 competes. Because of Boeing's enormous backlog of orders, smaller competitors could win market share by offering shorter lead times on orders that Boeing could take years to deliver.
In addition to protecting its market share, accelerated production across its lineup of commercial aircraft, among other things,in recent years has fueled increases in Boeing's operating cash flow.
Chart by author. Information from Morningstar.com.
That leaves more flexibility for returning value to shareholders, which is exactly what Boeing has done.
In December, Boeing announced the company's authorization for its share repurchase program had been increased to $12 billion. Boeing Chairman and CEO Jim McNerney also announced a strong 25% quarterly dividend increase to $0.91 per share. That means Boeing has increased its dividend by 88% over the past two years and by a staggering 192% over the past 10 years -- look at the rapid increase below, which correlates with Boeing's improved operating cash flow.
Chart by author. Information source. Boeing.
Boeing faces hurdles that could impede its cash flow in the near term -- such as more inventory to meet increased production, and increasing costs on the 787 Dreamliner --and investors would be wise to keep an eye on the break-even point on Boeing's 787 program, which has now been pushed out to sometime in 2016. Setting the 787 aside, though, although Boeing has stumbled in the past when attempting to accelerate production while shifting to a new model, if the company has learned its lesson with supply chains, shareholders stand to be rewarded as production of the 737 soars and the 787 approaches breakeven.
The article Why Boeing Investors Could Be Seeing More Cash in the Years Ahead originally appeared on Fool.com.
Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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