Today’s big headline is that Quantas is cancelling a large order with Boeing. Thousands of articles have been written on the topic. The Boeing Company (NYSE:BA) shares are currently down 2.7% on the news. So what is the news?
Australian carrier Qantas has announced that it is canceling an order for 35 of the new Boeing 787 Dreamliner jets. The details are broken down as follows:
Qantas also disclosed its plans to retain 15 787-8 orders for 2013, cancel 35 787-9 orders for 2014/15 with option rights intact for 50 787-9 to commence in 2016.
The announcement came after Qantas announced a loss yesterday of $260 million. The cancellation is the biggest one ever for the 787, which Boeing has big plans for, as its next generation carrier.
Qantas is not opting for another airline builder, like competitor Aierbus (ticker), Qantas states that they are cancelling to cut costs. The transaction is valued at a whopping $8.5 billion. However, the headline number is misleading.
The Boeing Company (NYSE:BA) ,, down 2.7% lost off its market cap on this news which is about $1.5 billion. This is interesting because Boeing did not lose $8.5 billion in profit. First the $8.5Billion is in revenue not income. Boeing and the airline indsutry in general have low margins, so the bottom line will be much lower than $8.5B. The number wont even be close to $1.5 billion, so what is the total cost?
First, Stifel Nicholas notes that The Boeing Company (NYSE:BA) already has 4,139 firm orders in backlog, 844 of which are for 787s, the impact of 0.85% is small, and such an event is a normal part of the business. So if the market was rational Boeing should be down 0.85%, but really the numbers are even better for Boeing.
Wells Fargo Equity Research agrees, stating ‘ At a delivery rate of about 120 in 2014, it will take years to work through those firm orders (even without considering options exercises), and so this one cancellation would not derail any earnings or cash flow estimates for Boeing or the suppliers.’
Jefferies notes that the cancellation could have a $1 to $2 short-term impact on Boeing’s stock price, because Qantas is an important customer and Boeing is losing part of an order. However, most of the above firms note that it will be easy to make up the loss with other orders. Also, Jefferies notes that this could impact the STOCK PRICE by $1-$2billion, not the income of the company.
Goldman Sachs Group, Inc. (NYSE:GS) notes The Boeing Company (NYSE:BA) stated on its 2Q earnings call that cancellation and deferral activityytd was trending below an average historical annual level, and we believe that is likely still true after this change by Qantas.
Using a back of the envelope calculation, Boeing, with an after tax income margin of approximately 5%, will lose approximately $43 million! Not even close to $1.5 billion, plus with the $400 million it owes to Qantas, the numbers still do not come close to the decline.
Then again the market is not always rational.
Disclousre: No Position