Here's How Airbus Will Beat BoeingJul 07, 2022
Airbus is down 20% over the last month while all of their competitors are down roughly 5% over the same time period.
So what's causing the difference? It may be hard to believe but there's no obvious reason and we believe the sell-off is unjustified.
That's because Airbus is just as exposed to the same macro headwinds that its competitors are.
But unlike their competitors, we think they have stronger long-term business prospects -- namely around profitability, pricing and orders.
So, let's get into the details below on why we think this stock is currently oversold and undervalued.
As we just mentioned, we think Airbus's selloff is unwarranted and love their longer-term business prospects. But what specifically is driving that favorability?
Well, it's a combination of the macro and the micro -- aka the things happening externally & internally that is pushing Airbus's business forward.
So let's dive into the macro (aka external) first.
Airbus Macro Factors:
The first thing we've noticed is that higher jet fuel prices have incentivized airlines to buy new planes. At first glance, we realize this may be counterintuitive as higher jet fuel prices have decreased travel volumes recently. However, in the face of higher costs, airlines are opting to buy newer more fuel-efficient planes in order to keep fuel consumption down. By keeping fuel consumption down, airlines will be able to decrease costs into perpetuity. Given Airbus is a leader in efficiency, it makes sense that higher fuel prices would actually benefit the global aerospace manufacturer.
While this next macro factor isn't a positive mark, we believe it's not as bad as investors currently believe it is -- thereby making this a reboundable event in the next 12 months. And that is while short-term hedges and inventories have mitigated higher energy and materials costs today, in the long term these are likely to act as a headwind to margins in 2023 - 2024. While most investors realize this, we think the earnings revision the market gave Airbus was extremely aggressive and therefore oversold. That's because we believe Airbus has a greater ability to manage these higher costs better than most of their peers. That's because Airbus should be able to pass on a good percentage of these costs via pricing power on the A320 plane series & improved fixed cost absorption. Therefore while profits will likely decrease, we believe the decrease will be slower than most people realize, actually making this a tailwind over the long run as this event is already largely priced in.
So if you skimmed through that the summary of the macro events is that higher fuel prices are actually helping them sell more planes, and the higher supply chain costs aren't as bad as investors are making it out to be there.
Therefore we believe the combination of these two events will eventually bode well and act as tailwinds for Airbus's business.
But that's just the macro. Let's hop into the micro (aka the internal) 👇
Airbus Micro Factors:
Airbus's competitive offering is stronger than it's ever been before. That's because when looking through their most recent data points, we see that orders and features both signal that their new aircraft could be the most differentiated & profitable aircraft ever. Therefore, because this plane is more efficient and just overall better, we think Airbus can push their excess costs down to the airlines -- thereby avoiding compressing margins further. This only gets amplified further when we look at their next plane (A321 XLR - est launch in early 2024) and the unit economics surrounding it.
- Airbus is seeing much more demand than their next closest competitor - Boeing. In may, Airbus delivered 47 aircraft which is in line with the year before. Additionally, this may new orders hit 13 with 0 cancellations. When comparing this to Boeing we see that they delivered 35 aircraft. Additionally, when looking at their month-end backlogs we see that it totaled 7,037 for Airbus and 5,142 for Boeing. Long story short, while its a small win, its still a win for Airbus over Boeing.
If it's not obvious by now, we not only truly like Airbus but we think investors are completely overreacting to the recent news surrounding the industry and the stock in particular.
The shares trade at relatively large discounts to historical averages (e.g. 8x EV/EBIT -- which is a 30% discount to norms). While this is just one metric, we see this across the board and therefore believe a rebound is imminent.
Similar to many of our picks, while we believe the stock will go up, timing the complete bottom is impossible.
That's why we're initiating a position in this stock now and will add more to it if it continues to slide further!
Target Price: $31 (35% upside)
Current Price: $23
Target Date: 10-12 Months
Market Cap: 73B Euros
Dividend Yield: 1.62%