It’s earnings season for airlines and aircraft manufacturers. With the exception of a few airlines, they all seem to be doing swimmingly well but…
Do you believe Boeing is a better stock buy following its recent success over Airbus at Le Bourget? Indeed, shares of the US aircraft manufacturer soared (now hovering over USD230) end-July after the Chicago-based company reported 2Q core earnings per share of USD2.55/share, above the Street’s estimates of USD2.31. A year ago Boeing reported a loss of 44 cents per share.
Look closely at the latest earnings and one will see a drop in commercial aircraft deliveries (minus 16 aircraft from a year ago – that’s an 8% reduction). That equates to a revenue miss, down USD22.7 billion, from analysts’ expectations of USD23 billion.
That said, Boeing has done well in managing its cashflow, shedding jobs and transiting from the current 737 production to the MAX , an aircraft that is expected to win more orders in coming years. It’s impressive by any measure, but we think the share upside potential is limited.
Of the four major aircraft makers – Boeing, Airbus, Bombardier, Embraer – which one offers the best value for money, if you’re an investor? Airbus announced its 2Q figures that were about 3% behind analysts’ estimates – sales came in at USD18 billion and operating profit came in a tad over USD1 billion (the Street had anticipated closer to USD1.1 billion).
Airbus has a few issues it needs to get a grip on: (1) engine woes for its A320 new engine option, or neo; (2) delays over its A400M military transporter; and (3) declining interest in the A380.
Toulouse-based Airbus is on course to deliver over 700 planes, but the problem with the A320neo is not with the manufacturer, rather with supplier Pratt & Whitney, according to the European aerospace company. Meanwhile delays on the A400M programme meant a EUR2.2 billion bill.
The A380, meanwhile, is altogether another headache for Airbus, with production now adjusted to 12 (from 27) in 2018. In our view, the A350 is the future for Airbus, not the A380. And the quicker Airbus sorts out what to do with the mammoth plane programme, the faster it will reinvigorate investor confidence.
Boeing is now touting a plane which it calls “middle of the market” or MOM, a product that lies in between a single and twin-aisle aircraft. Boeing’s head of commercial aircraft Kevin McAllister thinks there’s a demand for up to 4,000.
We’re not convinced, given that Airbus’ A321neo (with 236 seats) is already serving that market and has been outselling Boeing’s 737 MAX 9 (220 seats). Orders for the A321neos is close to 1,400. And the A321neo has an added advantage – a long-range version in the form of the A321neo LR, offering a 4,600 mile range, compared to the B737 MAX 10’s 3,700-mile range. Expect to see more future orders for the A320neo/A321neo as well as the A350.
The regional aircraft makers, Bombardier and Embraer, seem to be doing relatively well, too. Canada’s Bombardier reported an unexpected profit of 2 cents per share for 2Q17 (Apr-Jun), beating the 1 cent loss estimate by analysts polled by Bloomberg.
Bombardier, which has been bailed out time and again by the Canadian authorities, expects to deliver 30 C Series planes this year, subject to available PW1500G geared turbofan engines. The C Series is a “nice little aircraft”, observed Airbus chief salesman John Leahy, but it hasn’t sold well, notwithstanding delays that plague the project. And it is positioned in a tricky segment – competing head-on against the A320neo and 737 MAX.
That brings us to Embraer, the world’s 3rd largest aircraft manufacturer (bet you didn’t know that!) whose latest product, the E190-E2, is slated for entry into service in the first half of 2018. The E190-E2 is powered by PW1000G engines and can seat up to 114 passengers in a single class configuration.
The launch operator for the E190-E2 is Norwegian carrier Wideroe, the largest regional airline in Scandinavia. Wideroe currently operates 41 Bombardier Dash-8 turboprop aircraft but has opted to switch to an all-jet fleet with up to 15 of the new E190-E2s.
The E2 programme has been quite amazing: on time and on budget. We think sales will pick up once the first E2 is flying and once airlines, especially those second-tier carriers in Asia who aren’t making pots of money (if at all) with their Airbus and Boeing planes, start to understand that sometimes, smaller is better and smarter.
While the costs to the E2 programme have inevitably eroded Embraer’s stock price, currently floating just above USD20/share, there’s a good reason to believe – after the company’s latest 2Q earnings – there’s more room for upside. Embraer said it earned 32 cents per share and that revenue rose close to 30%, to USD1.77 billion, which is higher than the USD1.62 billion the Street was expecting.
The Brazilian company reaffirmed guidance for 2017; it expects revenues between USD4.9 billion and USD5.7 billion. Weakened defence and business jet segments are also affecting its profit. But the commercial side is doing quite well, thank you very much and we think the stock is undervalued and could outshine its peers in North America and Europe.
Clearly, there’s room for more growth. In China, for example, the government is telling its super rich to cut back on lavish spending, including private jets. Jackie Chan, the effervescent Hong Kong actor and an Embraer ambassador, will need to do more than say a few nice things about his Legacy 650…