it’s a cyclical business involving massive capex to get plants up and running and then those plants become severely underutilized in down times, causing some to temporarily close. semi companies are not unlike auto companies in that way. MU is one of the most impacted by this as they are representative of the marginal commodity chip producer.
R&D in new semi manufacturing is unrelated to the capital flows to operate the business. 1) outlook improves creating future supply shortage. 2) you spend several billion to create a new facility. 3) facility takes a couple of years to be operational. 4) new capacity comes online but business cycle turns, pushing semi prices down and forcing some semi producers to cut production or facilities, 5) see 1 again. does this sound like a commodity company to you? it sounds like an oil sands operator to me. any technological advantage only partially soothes the pain of this cycle.
while IoT will probably drive demand going forward, chips used for IoT are generally quite basic relative to the past (computers, mobile devices, etc) and are likely to be commoditized more than semis of the past given the sheer quantity and general low price point required.
the only way to say the trading pattern for semis has changed relative to all history is to assume that the near future is completely different than all of history. wasn’t the dawn of the PC revolutionary enough relative to IoT? wasn’t the dawn of the mobile phone enough relative to IoT? i don’t see IoT somehow having a more material impact on semis than those two past advances. it’s still a supply and demand equation with crap tons of capex required to meet supply.
Listen to United’s 4Q17 call, it’s a long one (1:46) but a great in depth overview of airline networks in the first 36 minutes (Scott Kirby’s section) if you’re casually interested in how these things work. Great ERJ read through based on what I’ve been saying about “filling in the cracks” as the next foot to fall in aerospace as well. MUGA (Make United Great Again) tagline dropped by Scott Kirby.
Isn’t ERJ getting low balled at the current price based on the original analysis? And BA has been killing it… I vaguely remember negative view on BA in the original discussion.
Will depend on how this JV plays out in terms of orders but looks positive to me. Nice for people who like Boeing but not Boeing’s valuation. Looking at comparables, the JV with Airbus has been great for Bombardier. A nice cash takeout offer would have been a nice way to bookend everything but the tradeoff here is getting to participate in upside. This makes a lot more sense as I couldn’t visualize how Embraer could have survived on the remaining units if it sold commercial. I still think Embraer offers a nice compelling opportunity, especially if they can form a military JV with Boeing as well which seems to be in the works. We’re also seeing a recovery in business jets and most of the big capex is now behind Embraer. Another thing to keep in mind is they are net long the dollar (by a small amount) meaning as they sell in the dollar but have some Real costs, the relative strength of the dollar vs the real is helping their margins.
Eyooooh! This comes after a long dry spell. I think this will definitely be the beginning of a nice surge.
Boeing, Embraer Split $2.3 Billion Aircraft Order From United
United buys 25 E-175s, 4 Boeing 787-9s to replace older planes
Deal a boost to recent Boeing-Embraer alliance for smaller jet
By Anurag Kotoky and Justin Bachman
(Bloomberg) –
Boeing Co. and Embraer SA won orders valued at $2.3 billion from United Airlines in a boost to an alliance the two planemakers announced earlier this month.
United Continental Holdings Inc. will buy 25 Embraer E-175 planes and four Boeing 787-9 Dreamliners, it said in a statement Monday. At list prices, the Embraer jets are worth about $1.2 billion in total, while the widebodies are worth $1.1 billion excluding customary discounts. Deliveries are set to start in the next two years.
It’s tougher sledding than I thought but I think my conviction is about the same. 2019 is first deliveries for KC390 (military cargo) and delivery ramp for the new generation of E Jets (Commercial). They also have the tailwind of the Boeing JV. My biggest question mark is just in the seeing how the value creation of the Boeing JV plays out (with the agreement still uncertain) although broadly I’m on board. I mean, this quarter’s results were basically tanked because of a freak flight test accident on development that is 96% complete with the KC390 that basically forced them to absorb the cost of another aircraft into the test flight lineup while also pushing off realization of revenue for first delivery to 2019 and causing them to eat costs on supplier contracts and fixed cost front. Orders were strong at Farnborough and I’m genuinely on board.
It’s just so hard as an investor to be patient through these development periods which take several years plus the cash burn during production ramp. It’s not something you see in many industries.
thats something that can provide alpha though - your ability to hold & lack of constraint of needing to provide a return this month/quarter/year to generate $ for your firm/investors.
