The aircraft business has always been very competitive. Unlike cellphone manufacturers, whose profit margins hover in the 60% plus range, giants in the aerospace industry have been struggling to crack double-digit margins. But with two of the world’s largest companies in the industry set to report earnings this month and early next, investors might be wondering if its worth stepping into high-flying positions in these companies.
France’s Air Bus SE (AIR.PA) and U.S. giant The Boeing Company (BA) have been fierce rivals in the thriving aerospace industry for over half a century (Boeing was founded in 1916, Air Bus was established in 1970). Since the formation of both companies, they have continued to evolve, through mergers and acquisitions, but they maintain their respective statuses as symbols of French and U.S. industrial prowess.
With regards to the number of planes both rivals produce, they tend to be neck-in-neck. When BA reports its 2018 earnings this week, it is expected to confirm delivery of between 810-815 planes (50 more than last year). According to AIR, the company has delivered 800 aircraft in 2018, breaking a record of 718 units delivered in 2017.
BA has the full support of the White House and the Pentagon behind it, as it is heavily involved in U.S. military and defense contracts. However, through its Airbus Defense and Space segment, AIR also participates in pan-European military programs – but those are not as elaborate and high-paying as its rival. In fact, when it comes to defense contracting, BA holds the distinction of being the largest supplier in the world.
Let’s look at the financials of two aerospace juggernauts and see if we can come up with an and/either/or thesis for the two names. The financial results from the previous quarter (Q3) and the previous year should give us an apples-to-apples comparison for both investment prospects.
On a Price/Sales valuation, AIR (1.17x) is a cheaper stock compared to BA (2.17). But on a P/E basis, AIR seems to be more expensive (29.93x) than its rival BA (23.58).
However, if we use these figures to calculate the growth rates, it would seem as though AIR has a slightly better growth profile (18%) versus rival BA (16%) – though marginally so. Both rivals have provided almost similar returns (8.78% vs. 8.62%) to shareholders over the past year.
When assessing the quality of their earnings, BA certainly seems to have an edge over rival AIR. Its Q3 revenue of US $25M is higher than the US $17.6M (€15.45M) posted by AIR. BA’s Net Income for the period ($2B vs $1.09B) and Profit Margins (9.40% vs 6.19%) also beat out rival AIR’s performance.
2017 financials also prove that BA outperformed its rival, yielding a profit margin of almost double (8.78%) that of AIR (4.30%). BA also generated more than twice the Operating Cash Flow ($13B) compared to AIR ($6B) during the year.
BA is expected to release its Q4-2018 earnings on Wednesday, Jan 30th 2019, while AIR’s earnings for the same period are expected to follow on Feb 14th, 2019. Analysts expect a solid US $4.581 per share from BA, while AIR is expected to report US $2.27 a share (€1.990).
Moving forward to the next year, BA is expected to report earnings of $4.126 and $4.346 per share for Q1 and Q2 2019. AIR’s expectations for the same quarters is $0.65 and $1.21 (€0.569 and €1.058) respectively. Clearly, analysts see BA outperforming AIR in the coming year.
With so much in common, and not much expected to change in the competitive landscape, which of these two would make a better addition to portfolios? Both rivals seem to be suffering from the general malaise of weak global economic conditions, and the U.S. China trade war. But AIR has the added headache of Brexit to cope with.
Instead of choosing one over the other, a better play would be to add both these names to the portfolio. It’s true that they are related, and will likely move in lock-step over the coming months. But by putting both eggs in your basket, you’ll have the benefit of a global duopoly working for you.