Interactive Investor

The stock to own in this booming industry

These two giants of air travel have enough work to keep them busy for many years to come, and more big orders are expected. Overseas investing expert Rodney Hobson runs through the numbers and picks his favourite.

22nd November 2023 08:54

Rodney Hobson from interactive investor

    During the pandemic we learnt to live without foreign holidays and business people found they could communicate equally well over the airways as by travelling with airlines. Green protestors against fuel use were in the ascendancy.

    Yet this autumn has proved to be a season for renewal of life in aircraft manufacturing, as rivals Boeing Co (NYSE:BA) and Airbus SE (EURONEXT:AIR) have been winning new orders from flag carriers seeking new, more fuel-efficient planes to thrust them into a brave new world. Their problem now is not to drum up orders but to avoid being overwhelmed by them.

    Current order books for the two giant manufacturers are reckoned to be approaching 14,000, more than the previous record achieved just before the pandemic dealt a supposed death blow to air travel.

    The total of additional orders so far this year has been 2,500, easily beating last year’s tally of 2,064, with five weeks still to go. The Dubai Air Show, held in mid-November, has been particularly lucrative, with a range of orders from Europe and the Middle East.

    The bulk of outstanding orders have gone to Airbus, with 8,000 planes on the order book, while Boeing is approaching 6,000. Airlines could well be tempted to get further orders in quickly, since the queue for top sellers such as Boeing’s 737 Max stretches to four years or more for the first delivery.

    Boeing halved its third-quarter loss to $1.64 billion on a 13% rise in revenue to $18.1 billion despite a disappointing performance in the defence sector, where it faces stiff competition from American rivals such as Lockheed. At least the supply chain, which was a serious worry last year, has stabilized. Another positive is that the group has cash flowing in rather than out, with free cash flow for the full year forecast at $3-5 billion.

    At Airbus, revenue increased 12% to €14.9 billion in the third quarter, but net earnings slipped 9% to €2.33 billion, again with the commercial aircraft side doing well as production was ramped up but defence and space falling short.   

    While Boeing has put two fatal crashes of its 737 Max behind it, Airbus has suffered an unexpected glitch in one of the engines powering its new fuel-efficient A300. While the cost of compensation to airlines will fall on engine manufacturer Pratt & Whitney, any disruption to A300 production will hit Airbus’s reputation and revenue.

    Boeing shares have not got back to pre-pandemic levels between $320 and $440 but they are well off the low of $95 hit in May 2020. They bottomed out at $120 twice last year but that floor has been left well behind and the current level is around $218. However, that is still shy of a recent peak of $240, which is likely to be reached again soon.

    Source: interactive investor. Past performance is not a guide to future performance.

    One drawback is that there is no dividend and, because Boeing made a loss in its last financial year, no means of calculating an historic price/earnings (PE) ratio, so great faith has to be placed in the company’s ability to make the most of its immediate rosy prospects.

    Airbus shares fell off a cliff as the pandemic struck, collapsing from €140 to €40 in pretty short order, but they have recovered further and more steadily than Boeing’s, reaching $134, where the PE is 26.2 and the yield 1.35%. These are not particularly impressive figures but at least they are far better than the non-existent ones at Boeing.

    Source: interactive investor. Past performance is not a guide to future performance.

    Hobson’s choice: I stick to the view that I expressed in June that Airbus is clearly the better prospect, as is reflected in the superior share price performance of late. Buy Airbus below €140. Boeing is no more than a hold.

    Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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