By: Carter Copeland
We’ve re-scrubbed our Boeing and Airbus numbers well into next decade (2021/2022). The outcome is bullish. Between 2018 and 2022, based on our model, profits and cash at the combined BA/AIR will CAGR at 15% and 15%, respectively. Given large backlogs and favorable production mix, we see very little, short of a major, coordinated, and global slowdown that presents any material risk to the outlook. Even cuts to production expectations on the widebody side do little to impact the algorithm. Both stocks remain cheap on any intellectually honest metric (i.e. not GAAP P/E) and as such, we see multi-year growth at both as very attractive and still relatively low-risk.
We’re often asked, “what worries you about your bullish aerospace OEM thesis?” Increasingly, we sense that the investor debate in aerospace is shifting to 1st/2nd derivative changes in several closely watched data series (traffic, airline profitability, cancellations, etc.), looking for signs of slowing or reasons to believe trading multiples can/should compress. We see little risk on the cycle front and intend to explore why our fears are limited in future reports. For us, an identification of risks/decisions/underlying execution is far more important for judging the long-term value of Boeing and Airbus. Today’s successes at both companies are the direct result of decisions made 4-5 years ago, and effectively lock-in the tremendous financial gains we expect over the next 4-5 years. However, financial returns beyond that point and the multiple investors are willing to pay for them will be determined by decisions made today and whether they point to continued success or reversion to a history littered with mediocre outcomes. The numbers we see for the next several years are going to be amazing and if both companies manage the risk vector appropriately, the stocks will be as well.
We’re now standing at a new precipice when it comes to risk identification and mitigation. Over the last 10 years, Boeing and Airbus have created $200Bn+ in market value and have outperformed their respective indices by 529% and 561%. Yes, the aerospace cycle has been unprecedently strong, with air traffic compounding above long-term averages, backlogs stretching far beyond historical norms and production rates hitting levels that even the most bullish observers couldn’t have contemplated. However, we think that the most important driver of the meteoric rise in share prices was structural change in the way both companies approached risk. These changes have pushed the potential return profiles of both companies materially higher and added incremental stability to their financial and operational outlooks. One question that we find ourselves asking of both companies more regularly is: Do they still get it? There are times when we feel Boeing’s success is emboldening them to add new risks at an uncomfortable clip (recent BDS bids, potential NMA launch) and the sheer level of executive turnover at Airbus still frightens us. We’re not sounding any alarms on the risk front yet, merely identifying the factor that we think investors should be watching most closely long term.
Inside we provide a more detailed history of BA and AIR’s experiences with risk, and why we think this history is so important.