EUR 850.00 For Business Accounts Only

Morningstar | Airbus Primed to Meet Growing Demand with Higher Production in 2019, but Shares Appear Fairly Valued

Shares for wide-moat-rated Airbus appear fairly valued at our EUR 120 fair value estimate. We think the market fully appreciates a robust aircraft demand environment and Airbus’ growing production rate. Airbus is currently divided into three segments: commercial aircraft, helicopters, and defense and space, but we believe the commercial aircraft business will drive most of Airbus’ valuation and support margin expansion, as it represents roughly 80% of the manufacturer’s operating income. Under new CEO, Guillaume Faury, we expect Airbus will maintain the status quo and extract value from increasing narrow body production.

We model increasing aircraft deliveries through 2023 thanks to Airbus raising its narrow body production from above 60 in 2019 to over 66 by 2023. We base our forecast on Airbus eschewing supply chain issues that hampered deliveries between 2016 and 2018. Growing A320 production is the biggest driver in our valuation model as A320 deliveries account for 75% of Airbus’ overall deliveries through midcycle. What’s more, we assume single aisle deliveries peak at 770 in 2022 before retreating to normalized aircraft demand through our 2028 midcycle year. With A320neos comprising a greater percentage of narrow body deliveries, we assume A320neo contribution margins drive consolidated operating margins to around 12% through 2022. Concurrently, operating cash flows before pension contributions leap above EUR 7 billion by 2020.

We also expect Airbus will extract benefits from a growing supply of A350s and A220s while drawing down production on its A380 program into 2021. Cash flow is boosted by the A350 reaching break-even operating profit (it's already break-even on a pre-R&D basis) in 2019 and generating cash starting in 2020. Simultaneously, we model the A220 achieving deliveries above 60 in 2020, with contribution margins concurrently turning positive.

We expect slightly different outcomes for Airbus Helicopters and Airbus Defense and Space. While we see the order recovery in the helicopter unit, with Airbus climbing from the trough of 350 gross orders in 2017, we think long-term growth is capped by weakness in offshore oil and gas demand. Since Morningstar expects total offshore rig counts will exit our 2028 midcycle period roughly flat versus 2018, we see little reason for Airbus to realize robust demand through our 10-year forecast period. As such, we expect moderate commercial demand will offset defense order strength.

Entering 2019, the A400M aircraft program will continue weighing on Airbus’ defense and space systems, but an end seems to be in sight. In both 2017 and 2018, Airbus claimed charges of EUR 1 billion, but renegotiated customers contracts in 2019 should offer relief and limit future charges to EUR 500 million in 2019 and 2020. Conversely, Airbus’ Eurofighter program looks positioned to capture orders after the Lockheed F-35 was removed from Germany's ongoing fighter competition. The Eurofighter is now the frontrunner in our view to replace the country's aging Tornado fleet and could garner about 90 orders should it beat out Boeing's F/A-18.