The global pandemic may have slowed down air travel for a bit, impacting sales across the entire aviation value chain, but the industry has been on the rebound. The top commercial aircraft makers set to benefit from this rebound are Airbus (XPAR:AIR, Financial) and Boeing (BA, Financial), but which of these is the better investment? Both of their financial projections show expectations for prolonged growth and success. Some key areas to examine are long-term transformation efforts, digitalization, decarbonization and financial strength.
Airbus
Airbus is estimating revenue growth of 10.44% and operating cash flow growth of 17.38% for the next fiscal year. Its forward enterprise-value-to-sales ratio is 1.48, which signifies undervaluation as compared to the sector median.
In 2022, despite a challenging operating environment and disruptions caused by Covid-19, the Russian invasion of Ukraine, international sanctions and the energy crisis, Airbus saw considerable demand growth for air travel and long-term fleet planning among airlines. It has ramped up production of its A320 family to a 75% monthly production rate to meet this demand while maintaining strong financial performance.
Source: Investor Presentation
As Airbus sets ambitious targets for 2023, the company remains committed to growth and value creation. The company targeted 720 commercial aircraft deliveries, adjusted Ebit of 6.0 billion Euros ($6.62 billion) and free cash flow (before M&A and customer financing) of €3.0 billion. Airbus is focused on delivering on its commercial aircraft ramp-up, transforming its operations for a net-zero future and leading the development of sustainable aerospace.
The helicopter division is particularly promising, with a book-to-bill ratio (orders captured compared to units shipped and billed) above 1 in units and value in 2022. In addition, the defense and space division faced macroeconomic and geopolitical complexities but secured essential contracts critical to the company's future.
In addition to its commercial aircraft operations, Airbus contributes to Europe's defense and high-end technologies while developing innovative technologies to launch a hydrogen-powered aircraft by 2035.
Overall, Airbus remains confident in its performance and maintains a strong culture and governance concerning ethics and compliance. With a robust and diversified backlog, the company focuses on ramping up commercial aircraft production, including single-aisle aircraft, while collaborating closely with suppliers to match production. Long-term growth efforts include digitalization and decarbonization, and even setting the sustainability agenda for the entire aerospace sector.
Boeing
Boeing is the other top player in the commercial aircraft industry, though its focus is more on the U.S. than Europe. After a tough few years following the 737 Max issues and a couple of other financial disasters that destroyed its balance sheet and even put it in danger of bankruptcy according to the Altman Z-Score of 1.37, Boeing managed to hang on and begin recovering post-lockdown. It now predicts it can achieve revenue growth of 13.51% next year, as well as a leveraged FCF margin of 7.63%. The forward enterprise-value-to-sales ratio is 2.11.
Fundamentally, Boeing has a solid plan for long-term growth, evident from its projected 2023 commercial deliveries of 400 to 450 737s and 70 to 80 787s. Despite an increase in R&D expenses to approximately $3.2 billion, the company expects to generate $4.5 billion to $6.5 billion in operating cash and $3 billion to $5 billion in FCF. In the longer term, Boeing aims to achieve nearly $10 billion in FCF and improve revenue to $100 billion and operating margins to 10% by 2025 or 2026.
Source: Earnings Presentation
Furthermore, Boeing had a successful fourth quarter in 2022, generating more than $3 billion in non-GAAP FCF thanks to 737 Max and 787 return to service and deliveries. This led to positive full-year cash flow for the first time since 2018. It has significantly reduced risks and restored operational and financial strength. The company continues to receive strong demand across its portfolio, with over 800 net orders driven by the 737 Max and 787 and more than 1,500 gross orders.
While not quite at Airbus' level, Boeing says it is committed to sustainability and innovation, evident from the recent announcement of a Sustainable Flight Demonstrator Contract with NASA. The project aims to cut fuel emissions by up to 30%, a significant achievement for the company.
Boeing does note that it has supply chain challenges, but is confident of meeting demand and maintaining stable rates. The company is working with all suppliers to improve rates and has a robust pipeline of development programs, particularly in its defense business.
In the past year, Boeing has seen growth in revenue and orders, with $7 billion in orders during the last quarter alone. The company's FCF has also improved significantly, generating a $2.3 billion positive FCF in 2022. Boeing's commercial market is recovering well, and the company's service business remains strong.
Takeaway
In conclusion, Airbus and Boeing have a few differences from the investor's perspective, even if they look almost identical at first glance. Each has its own unique appeal. Despite the economic difficulties and geopolitical complexities, both companies believe they can achieve long-term growth and value creation. Despite Boeing's hiccups, it has returned to a stable financial position, though its balance sheet is still much weaker than that of Airbus. Still, considering fundamental valuation and forward growth drivers, I believe Airbus is edging out Boeing as a better long-term opportunity.
