In this clip from Industry Focus: Industrials, Sean O'Reilly and Adam Levine-Weinberg talk about which airplane manufacturer is a better buy for long-term investors: Airbus (NASDAQOTH:EADSY) or Boeing (NYSE:BA). Find out which has the bigger backlog (and why that isn't necessarily a good thing), what's coming around the bend for both companies, what's going to be cutting into demand for the next few years, and, of course, which company is a better buy.
A full transcript follows the video.
This podcast was recorded on Jan. 26, 2017.
Sean O'Reilly: Let's talk some numbers before we head out of here. Who sells more planes?
Adam Levine-Weinberg: As I said before, Airbus definitely has a lead right now in terms of the orders. Every year for the last few years, they have pretty reliably come in ahead of Boeing in terms of orders. On the widebody side, both companies had about 1,200 or 1,300 orders in backlog, and those planes tend to go for $100 million or more. So, between the two of them, that's several hundred billion dollars of planes. On the narrowbody side, the numbers are actually even bigger. Boeing has over 4,400 planes that are in backlog just with the 737 and the upcoming 737MAX. Airbus has over 5,600. That's quite a bit ahead.
O'Reilly: This is a lot of planes we're talking here.
Levine-Weinberg: So there's definitely an advantage for Airbus, but the fact remains that it's going to take Boeing seven years just to build all the planes that it has. Airbus, it's kind of overkill. It's great to have that many orders in backlog; it means that you can survive a recession where you might have orders dry up suddenly for a couple years at a time. But unless that happens, it's not going to really matter so much, because Airbus doesn't have the capacity to build planes much faster than it's already planning to build them, which is less than 700 a year. So it has eight or nine years of production already locked in. As a result, it's just not going to sell as many planes in the future, or it's going to have to figure out some way to build new factories or squeeze more planes out of the existing factories it has.
O'Reilly: So, obviously, this is The Motley Fool; we're investors. What do you see coming around the bend for these guys, and what do you think of the valuations of these companies? I have looked, Boeing is long -- I cannot believe this company's return on capital and equity. It's like in the 90s, some years, 90% return on equity in a year. It's a fun balance sheet, and we can talk about that a little bit more another time. But it's got a 12, 13 multiple P/E. Airbus, it's a good business, but it's inferior by every measure. They're not free-cash-flow positive most years. Boeing just throws off money like it's its job. Which stock do you like? What do you see coming around the bend for these guys?
Levine-Weinberg: I still like Boeing's stock. It has run up quite a bit in the last few months. Early last year, about a year ago, it had dived down to the low hundreds, and it's risen about 15% since then. But I still think that Boeing could continue to gain ground over the next few years. Right now, they have a little bit of a transitional period where a couple of their models, particularly their 777, which has been a big cash cow for them in the past few years, demand is really falling off. But the reason why is that you have a new version of that plane which is coming out in 2020.
O'Reilly: And they all know it, so they're not ordering it.
Levine-Weinberg: Everyone knows; they announced it several years ago. It's really hard to keep selling an old plane when everybody knows that a new, better model, more fuel-efficient, more range, is coming out not that far in the future. And it's also true that right now, a lot of the developing world in particular has been having trouble both with a strong dollar, which makes it more expensive to buy these planes, and also just unsteady demand, especially in places like Russia and Brazil, where you've had big drop offs in GDP recently. So that's definitely cut into the demand for these planes. But if you look out to 2020 and beyond, once that new version of 777 ramps up, Boeing is going to be, I think, in pretty good shape to continue growing its free cash flow.