Morningstar | Initiating Coverage on MTU Aero Engines With a Wide Moat and FVE of EUR 165; shares overvalued
MTU Aero Engines is one of the few independent Tier 1 aerospace engine suppliers, and also a contractual partner, sharing economic risk and reward with the well-known engine manufacturers like Pratt & Whitney and General Electric. MTU is in the sweet spot of the aftermarket cycle, benefiting from an aging V2500 fleet, 70% of which have not had their first heavy shop visit. These mounting maintenance needs should drive demand for high-margin spare parts in the coming years. Pratt & Whitney’s new geared turbofan engine, or GTF, has a margin-dilutive effect on MTU’s earnings that should diminish as a result of efficiencies gained through volume, operational maturity, and automation. However, we see tailwinds for MTU’s profitability, stemming from high spare parts demand and the low-cost location expansion for maintenance, repair, and overhaul activities.Strategic alliances, in the form of direct original equipment manufacturer partnerships and joint ventures, have secured MTU’s position in both narrow- and wide-body aircrafts. The PW1000 G family (GTF) and its predecessor, the V2500, are key engine programs for MTU’s profitability and returns. The V2500’s entrance into service should generate continuous growth in the high-margin aftermarket. In the newer engine cohort, GTF powers Airbus’ A320neo, the latest generation of narrow-body aircraft. Its competing engine is the Leap engine, developed by a GE-Safran JV. Airlines have only two options to power their narrow-body aircrafts: GTF or Leap engines. Because of its unconventional design, the GTF is expected to be intrinsically more cost-efficient (fuel savings and maintenance). However, the GTF comes with the inconvenience of building capabilities to maintain a new engine design, which embodies higher risk. We assume fleet commonality to prevail in the purchase decision, so the current GE and P&W engine share split on the A320 should largely persist on the neo version. The company is also exposed to wide-bodies through GE’s GEnX and CF6 programs. We expect narrow-body platforms to produce robust demand for MTU equipment and services in the first part of the next decade.MTU Aero Engines manufacturers engine modules and components, and providers MRO (Maintenance, Repair and Overhaul) services for commercial aero engines. Co.'s activities range through the development, construction, testing and production of new commercial and military engines and spare parts, through to maintenance, repair and overhaul of commercial and military engines. Co.'s segments comprised of: OEM business (Original Equipment Manufacturing), which covers new commercial engines, including spare parts, and the whole of the military sector; and MRO business, which engaged in commercial maintenance activities covering the areas of maintenance and logistical support for commercial engines.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.