Boeing vs Airbus

Boeing vs Airbus

SHARE PRICE: $403.95

MARKET CAP: $229.4B

1. INTRODUCTION

The other day a friend of mine analyzed Airbus making some comparisons to Boeing along the way. Now I’m going to do the opposite. I am expecting to find a great business given the fact that we are talking about a duopoly. I’ll start by taking a look at the company’s Website.

2. BUSINESS OVERVIEW

2.1. BUSINESS DESCRIPTION

Boeing was founded by timber businessman William Boeing back in 1916 and its IPO was in 1978. Boeing’s history is closely interconnected to the history of the U.S.A armed forces. The first airplane Boeing has ever made was delivered to the US Navy during WWI. Boeing has been one of the top U.S. defense contractors ever since. Also interesting to find out that Boeing and United Airlines were part of the same company until 1934.

Boeing is now the world’s largest aircraft manufacturer and the U.S. largest exporter, having delivered in 2018 alone 806 commercial airplanes, 96 military aircrafts and 2 satellites. 

The company is comprised by four major divisions:  

Commercial: The business unit that manufactures and markets commercial aircrafts to airliners and lessors. This has been a duopoly shared between Boeing and Airbus for some time now and the barriers to entry are some of the highest across all industries.  

Defense, Space and Security: Boeing is the second largest defense contractor behind Lockheed Martin. They design, build and sell fighter jets, bombers, drones, missiles, surveillance solutions, satellites, among many other equipment and their main client is the Department of Defense making this division highly susceptible to Government spending.

Global Services: A new business unit that provides services in engineering and maintenance, digital aviation and analytical services as well as supply chain logistics and training around the world. 

Capital: Provides equipment leases and financing solutions do their customers. I won’t be analyzing this division due to the negligibility of its revenue.

2.2. LARGEST SHAREHOLDERS

The largest shareholders are the big funds.

Boeing stock analysis shareholders

2.3. MANAGEMENT TEAM

When talking about aerospace companies, a good management team is fundamental given the fact that good execution regarding multi billion dollar projects is paramount.  

Dennis Muilenburg stepped up as CEO in 2015 and I think it’s safe to say that the board hit the bullseye with this one. Rather than bringing someone from the outside, they opted for an operational person with years of experience inside the company and the bet is paying off.

Boeing stock analysis management

3. HISTORICAL CONTEXT

3.1. LONG TERM CHART

The share price has had a huge run since 2009, right after falling 70% from its previous high, and is now at $403,95. If you had bought it at $30,1 in 2009 you would’ve enjoyed a compound annual rate of return of 30%. But of course, that’s very hard to do, specially when everyone was so scared about the future. 

boeing stock price

3.2. MARKET CAP AND SHARES OUTSTANDING

After a magnificent ascent, the market cap is now $229,4 Billion. There are 579 million shares outstanding, a number that has been diminishing every year.

Back in December they replaced the existing share repurchase program with a new $20B program.

Boeing stock analysis market cap

3.3. SALES - OPERATING INCOME - OPERATING MARGIN

Sales clearly show a rising trend and reached the historical high of $101 billion in 2018. The operating margin has also been rising for the last couple of years reaching 12% in 2018, and it is expected to go to 15% in 2021.

Boeing stock analysis sales

Let’s compare the operating margin of both Boeing and Airbus.

Boeing stock analysis Operating margins vs airbus

It’s interesting to see that in 2008 they had the same margin but there is no doubt that Boeing’s operations are better oiled than Airbus’. From 2008 onward, Boeing has had at least double the operating margin compared to its arch-rival. 

3.4. SALES BY GEOGRAPHY

As expected the U.S.A represents 45% of revenue

Boeing stock analysis revenue by geo

3.5. SALES BY DIVISION

Also as expected, the commercial division is the strongest one accounting for 61% of revenue. The new division of Services has grown a lot in recent years and already accounts for 17% of revenue. Given the industry tailwinds, I think we will see this division grow a lot more in years to come.

How will these translate to operating profits is what we’re seeing next. I expect the Services division to have the higher margins.

3.6. OPERATING INCOME AND MARGIN SPLIT

And that’s exactly what is happening. 

Boeing stock analysis operating3

The commercial division is the one that brings in the most amount of dollars, but as we can see, the fairly young services division has 30% operating margin. 

3.7. NET INCOME, NET MARGIN

Boeing really is improving its operations. Just look at the jump between 2016 and 2017.  They almost doubled their net income from one year to the other. Net margin has gone up to 10%, while Airbus’ margin is around 4%.

Boeing stock analysis net income

But Boeing is generating even more cash than what the net income might show us. Because of the “program accounting method”, every year there are deferred costs being expensed, but that cash has gone out the door years earlier. If you want to know more about program accounting you can read it here

If we take a look at FCF we see that they didn’t make $10 Billion last year, but $13,6 Billion, representing a 13% margin. 

Airbus had a FCF margin of 2,8%!

3.8. RESEARCH AND DEVELOPMENT

Boeing has been decreasing its total R&D expense as a percentage of revenue.

Boeing stock analysis R&D

I don’t have the complete figures to post here, but the commercial segment is where the big bucks are being spent. On my next analysis I must not forget to give some color to this topic.

3.9. SEASONALITY

There is low seasonality in Boeing’s operations. The first quarter is usually the weakest one.

3.10. DIVIDENDS

Boeing has been steadily returning value to shareholders by increasing their dividends per share. The dividend yield is 2%.

3.11. PROFITABILITY RATIOS

Return on assets has been historically low and typical of this industry. I’m glad to see it has reached 9,5% last year, against 2,5% expected for Airbus. Again, Boeing beating Airbus by a wide margin.

Boeing stock analysis roa and airbus

I chose not to look at the Return-on-Equity because Boeing’s Equity has been too depressed, reaching negative levels throughout 2018.

3.12. FINANCIAL RATIOS

Current ratio is at 1,1. If we take out the cash from the balance sheet, we can see that Boeing and Airbus are both negative working capital businesses, which means the customers pay the company before the company pays its suppliers, which in turn means the suppliers are effectively financing the company.

Boeing is another one of those companies with negative or nearly negative equity, so it makes no sense to use the Debt/Equity ratio or even the Return-on-Equity ratio like I use to. 

A better metric to access Boeing’s level of debt is the Net Debt/EBITDA ratio. Boeing’s Net Debt/EBITDA ratio is 0.35, which next to nothing. Airbus’ has no net debt.

3.13. PRICE TO EARNINGS RATIO

The forward 2019 PE ratio is 19 and the historical PE for Boeing has been….. 19.

Airbus’ estimated 2018 PE ratio is 23, which means Mr. Market hopes Airbus will grow faster than Boeing.

3.14. RISKS AND COMPETITION

In my opinion the biggest risks for Boeing are:

  • Supply Chain. They’ve recently experienced some production delays due to one of their engine supplier not delivering the engines.
  • Trade Wars leading to problems in the supply chain like higher costs for aluminium and parts, and the possibility  for other countries to go to Airbus because of tariffs imposed in the USA.
  • Changes in government defense spending.
  • Program delays and cost overruns.
  • Safety leading to reputation.

3.15. TYPE OF PLAY

I consider Boeing a growth play.

3.16. BACKLOG

Boeing’s backlog at the end of Q4 had 5873 aircrafts at $490 billion dollars. Airbus currently has 7,577 aircrafts on its backlog amounting to around $1,05 Trillion. 

Boeing stock analysis Backlog

At first glance one might think that Airbus is selling more expensive planes than Boeing but the truth is that Airbus is stating its backlog at listing price rather than the price it actually sells those planes. Usually airplanes sell at a discount of around 50% from the list price. 

Because of new accounting rules, Airbus will have to state its backlog at the price it truly sells its aircrafts, so this number will come down to about half of what it is stated today. 

In other words Boeing has a backlog of approximately 7 years of production while Airbus has about 10 years at current production rates, which brings a lot of predictability and safety to the business.

3.17. REVENUE PER EMPLOYEE

I know this isn’t a usual standard metric but it’s gives me a feeling of the company’s productivity. 

In 2017 Boeing had 140,000 employees and it’s revenue was $93,4 Billion. That’s $667,147 of sales per employee. Airbus had 130.000 employees and 66,8 Billion Euros in revenue so the ratio would be $590,437 of revenue per employee. 

In 2017, Boeing’s employees produced 13% more revenue than those from Airbus.

Note: 2018 figures weren’t yet released at the time of the publication of this analysis.

4. OVERVIEW AND CONCLUSION

4.1. OVERVIEW

I really like Boeing. This is definitely one of those companies that at he right price, should be in every diversified portfolio. It’s part of a duopoly with huge barriers to entry, it has minimal debt, its industry is facing enormous tailwinds like sturdy global airline profitability and passenger traffic growth, it has a great management team and it has a huge backlog.

In my opinion, both Boeing and Airbus are great companies but Boeing presents itself as a better company than Airbus. I would say that having the 3 governments (France, Germany and Spain) among the largest shareholders might lead to a bigger concern about jobs rather than profitability. Boeing is better in every metric but the backlog. It just seems to me a better run company.

The projected long term average growth rate for passenger traffic is around 5%, so if we extrapolate that into Boeing we could be talking about $173 billion in revenue in 2028, with net margin going up through the years to 15%, which I see very likely as we are talking about a duopoly here, Boeing net income would be $26 billion. 

At the historical PE of 19, that would amount to a valuation of $495 billion. Adding back the net cash it will generate until then, we get a market cap of $685B, representing a 12% CAGR from the current market cap. 

4.2. CONCLUSION

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