Oh, my. This is not good news at all.
Struggling already to catch up to archrival Boeing (NYSE: BA ) in the race to win big plane orders in 2014, European plane-builder Airbus (NASDAQOTH: EADSY ) today instead sustained a massive order cancellation.
Dubai-based airline Emirates reportedly canceled its order for 70 long-range Airbus A350-XWB wide-body jets. The order was worth $16 billion to Airbus when originally announced in 2007. To make up the shortfall today, though, the company would have to sell $21 billion worth of A350s at current list prices.
Even more embarrassing for the airplane builder, Airbus has only booked 12 orders for A350 jets so far this year. So unless saved by another big buyer, today's cancellation threatens to rip open a huge hole in the company's monthly tally of plane orders, which will be released about four weeks from now. Until that hole gets filled, Airbus will have to report negative A350 orders on its book... for month... after month... after month.
Precisely. That's not going to look good for Airbus. It's not going to win the stock any fans among investors, either.
But how bad is this news for Airbus stock, really? Let's find out.
The impact on revenue
Whether you view the 70-plane A350 order as worth the $16 billion it was originally valued at or the $21 billion the company would need to replace it, this is a big blow to Airbus. According to S&P Capital IQ, Airbus did $81.6 billion in sales last year. Measured by that standard, the Emirates cancellation could cost Airbus anywhere from two to three full months of revenue.
The impact on profit
Airbus earns about 2.8% net profit margins on its airplanes -- barely half Boeing's net per revenue dollar. Again, judged by the twin standards of the contract's original and present-day values, this could cost Airbus anywhere from $448 million to $588 million in profit. Again, that's anywhere from 20% to about 25% of the profit that Airbus earned over the past 12 months -- a sizable setback.
It could even be worse than that. Airplane manufacturers need massive order books to enable them to spread out research and development costs over many planes sold, keeping prices down and permitting the eventual earning of a profit on the program. But Airbus just lost 8.6% of its total A350 orders in one blow. That's going to make getting the program up to scale even harder.
The upshot for Airbus investors
The good news, if we're to seek out a silver lining to this cloudy forecast, is that Airbus won't take this hit right away. Emirates' planes weren't due to begin arriving until 2019. This means that any negative sentiment arising from today's announcement may dissipate over time.
Depending on how you play the news, you might pile into the stock now, while sentiment is poor, on the assumption that Airbus will make up the lost plane orders, straighten up, and begin flying right again by 2019. Alternatively, if you take a dimmer view of today's news, you might bide your time, wait for sentiment on the stock to improve, and sell out once things have quieted down a bit.
Which route would I choose? Here's what it comes down to, for me.
Airbus shares cost more than 24 times earnings today -- a valuation even richer than Boeing's. Yet Airbus has a worse profit margin than Boeing. And Airbus is barely breaking even on its business from a free cash flow perspective -- while Boeing is rolling in dough, generating upward of 50% more cash from its business than even its generally accepted accounting principles financials reflect.
Given these facts, I think that today's news regarding the Emirates order is a perfectly good reason to sell Airbus stock.
And if you do sell Airbus stock, where should you put your money instead?
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