Who Will Win the Dogfight of Carbon-Composite Aircraft?

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The carbon-composite industry for air planes is worth $1 trillion. With the introduction of carbon-composites, the aircraft industry is also becoming more competitive than it has been for ages. Here is how the three main players stack up against each other.

Boeing (NYSE: BA) saw its stock sink by 5% after reports that its 787 Dreamliner caught fire sitting on the Heathrow airport. After earlier battery fire scares, the event now sheds light on whether there is a design or production fault with the product. This comes after The Paris Air show where Boeing was beaten by its competitors after it reportedly won provisional orders for 442 aircraft, higher in number but valued less at around $66 billion.

After suffering many years of stagnant revenue growth, Boeing experienced a spurt of growth of 18.8% last year. Seeing how the much delayed Dreamliner properly came into service last year, the growth is not surprising. What is expected to determine the future however, is the performance of 787-10 – the company’s new wide-body aircraft. After failing to deliver on time and eventually providing an aircraft which looks as prone to being lit up as taking off, Boeing has got its work cut out for it.

European Aeronautic Defence and Space Company (NASDAQOTH: EADSY.PK) is the parent company of much famed Airbus. To compete with Boeing’s Dreamliner 787, the company launched its latest product – the A350. The Airbus plane is less revolutionary than the 787. It has similarly efficient engines and enough carbon fiber to bring down the weight and fuel bill, but not the battery-driven auxiliary systems that have plagued Boeing.

At the Paris Air Show, Airbus took orders for 466 aircraft worth a whopping $69 billion, edging its rival out. After the success of its giant A380, the A350 has been launched to compete directly with the Boeing 787 Dreamliner – after initial test flights and display at Paris, the new aircraft’s prospects look bright at a time when Boeing has been unconvincing with its supposedly light weight and fuel efficient aircraft.

Lockheed Martin (NYSE: LMT) is not a direct rival to Boeing and Airbus, yet it is the most famed military aircraft manufacturer. It’s only logical to include it in this analysis; Lockheed Martin is after all, a pioneer at creating carbon-composite jet aircraft. The company’s vice president stated that U.S. and international buyers will help spur output of its latest F-35 fighter aircraft to more than 100 planes annually by 2020, from 36 aircraft this year. The company is aiming to recuperate the expenditure done on F-35’s research and development by employing mass production, which is expected to bring down the cost of a single plane by $35 million.

As defense budget cuts are incorporated in the U.S., the company has made foreign sales its primary priority; the company made 17% of its total revenue from abroad in 2012 and wants to see this figure swell above 20% in 2013

Financial comparison

<table> <thead> <tr><th> <p><strong>Indicator</strong></p> </th><th> <p><strong>Boeing</strong></p> </th><th> <p><strong>EADSY   <br /></strong></p> </th><th> <p><strong>Lockheed Martin</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Price/Earnings ttm</strong></p> </td> <td> <p>19.0</p> </td> <td> <p>25.4</p> </td> <td> <p>13.0</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong><strong></strong></p> </td> <td> <p>20.7</p> </td> <td> <p>3.6</p> </td> <td> <p>119.0</p> </td> </tr> <tr> <td> <p><strong>Net Income Growth (3 Yr Avg.)</strong></p> </td> <td> <p>43.8</p> </td> <td> <p>-</p> </td> <td> <p>-2.6</p> </td> </tr> <tr> <td> <p><strong>Revenue Growth </strong></p> <p><strong>(3 Yr Avg.)</strong></p> </td> <td> <p>6.2</p> </td> <td> <p>9.7</p> </td> <td> <p>2.5</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong><strong>, %</strong></p> </td> <td> <p>1.82%</p> </td> <td> <p>1.11%</p> </td> <td> <p>3.95%</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>65.4</p> </td> <td> <p>13.7</p> </td> <td> <p>302.4</p> </td> </tr> <tr> <td> <p><strong>Current Price</strong></p> </td> <td> <p><strong>$106.86</strong></p> </td> <td> <p><strong>$53.35</strong></p> </td> <td> <p><strong>$113.12</strong></p> </td> </tr> </tbody> </table>

Data from Morningstar and Financial Visualizations on June 15, 2013

The industry has an average P/E of 22.5, which makes Airbus’ parent company look overvalued. Lockheed Martin has not had stellar income growth over the past 3 years as represented by the illustration below. However, Lockheed Martin offers the highest yield of the three and provides a staggering return on equity. 

A company with a high ROE is more likely to be one that is capable of generating cash internally, as is the case with Lockheed Martin. Lockheed Martin’s high ROE metric is due to the efficient use of equity available i.e. an investment made in a high-tech military jet, as was the case with F-22 Raptor and most recently F-35, has always been initiated by the state's requirement for a new aircraft. This in turn, grants access to government backed buyers which are willing to pay a premium price for the unique aircraft.


<img alt="" src="http://media.ycharts.com/charts/73c9814a8210dba2904464e52f2df1de.png" />

Undoubtedly, Lockheed Martin has superseded its rivals due to terrific performance over the past 3 quarters. It has strong financials and an unparalleled standing in the industry. However, looking ahead to the remainder of 2013, and 2014 - its product sales and cash flow do not look as galvanizing as, say - EADSY. The company's Airbus division has timed the launch of A350 to perfection, since its primary rival Boeing has hit troubles with its directly competing aircraft - 787 Dreamliner. The company has already notched up 678 orders for the A350, while sales of smaller A320 , A320neo jets and the company's flagship A380 continue to remain strong.

Verdict

EADSY looks overpriced compared to its peers at the moment, but a very successful audition of its new air craft at The Paris Air Show and continued sales of its other aircraft make it a primary contender for a stellar 2nd half of 2013 and 2014. Based on the company’s sales, earnings and cash flow potential, EADSY is a strong buy.


Awais Malik has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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