Demand for Airbus Planes is Soaring
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Despite the troubling state of the global economy, demand for airplanes remains strong, especially in Asia. AirAsia’s good Q2 earnings have them considering a large deal with Airbus, and a number of other airlines also continue to expand their fleet. Airbus (NASDAQOTH: EADSY.PK), a division of the Netherlands based European Aeronautic Defence and Space Company, is one of the two major airplane manufacturers in the world together with Boeing (NYSE: BA). In comparing these two airplane makers, it seems as if Airbus is the more reasonably priced stock at the moment, and may despite the crisis continue to raise earnings through strong demand and cost cutting.
According to Reuters, EADS trades at 16x earnings compared to an industry average of 17.7x. The firm has a low LT debt to equity ratio of 46.8 and a return on equity of 16.1. The stock has quite a low beta of .89 and trades at 3.2 to book. The operating margin is a little slim at 4.13, but the stock does offer a dividend yield of about 1.5% with a very sustainable payout ratio of 24.16%. To compare, Boeing trades at only 12.4x earnings, but also at a sky-high 9.26 to book and burdened by a LT debt to Equity ratio of 150.5. Return on equity is excellent however, at around 83%.
EADS reported 2011 earnings of $1.31 per share, which beat analyst consensus by almost 40%. The company also had good results for H1 of 2012 and has raised guidance for the remainder of the year. H1 EPS came in at about €1.00 compared to €0.48 in H1 2011. EBIT nearly doubled to €1.4 billion of which €830m was generated by Airbus Commercial. The order book is at a record level of €552 billion. The firm’s hedging activity was successful so far in 2012 as the firm’s large exposure to USD has benefited from the weak Euro. Overall the underlying performance was very strong.
Driving these strong results is the increasing demand for Airbus commercial airplanes due to increased global air traffic and the modernization of their product portfolio. Airbus produces the world’s largest passenger liner, which has been especially popular in Asia. AirAsia, which already has 272 outstanding orders for A320 aircraft, may look to add another 100 Airbus planes to their fleet after blow-out earnings this quarter. Another Asian carrier, Philippine Airlines, today announced a $7bn dollar order for up to 100 new jets. Despite US displomatic support for Manila, Boeing was beaten to the deal by its European competitor.
According to industry experts, Airbus is also on the brink of signing yet another multi-billion dollar deal, as of yet the partner is unknown. Some insiders suggest the partner may hail from China. Due to earlier strong demand, Airbus raised its outlook for the year, with expected revenue growth rising from 6 to 10%. The EPS target was raised €0.20 to €1.85. Delays in the production and shipment of Boeing’s 787 airplanes lead one to be a little more cautious over their outlook. Still, Boeing too has raised guidance for 2012 slightly. It appears as if South-East Asia has become the new battleground for these aircraft manufacturing giants. The region currently accounts for 34% of aircraft deliveries. Air traffic in India especially is growing rapidly, by about 7.2% per year compared to the global average of 4.8%.
Of course, there are a number of factors that could affect Airbus’ profit in the near future. While aeronautics makes up only a small part of EADS' revenue, tough competition from companies such as Lockheed Martin (NYSE: LMT) might make expansion in this segment difficult. Lockheed Martin has also been doing very well in the past year, gaining over 20% and beating earnings consistently, although debt remains an issue for the company. Regarding Airbus, any slowing demand in global air traffic would more seriously impact sales. The company’s exposure to the US dollar could also work to its disadvantage if the Euro were somehow to sharply rise. Order cancellations are always a risk and could whittle down the order book if major clients were to get into financial trouble. Finally, rising commodity prices are a potentially costly issue.
To recap, Airbus seems to be in a comfortable position at the moment due to rising demand and a swelling order book. H1 earnings came in strong, and the outlook for 2012 is sunny. From a fundamental point of view the company is priced attractively at the moment. Despite a few risks, and the highly cyclical nature of the industry, Airbus may be an interesting long position for those looking to benefit from the global boom in airline passenger traffic, especially in Asia.
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