Traditionally, Boeing (BA +1.95%) has done a better job of converting revenue into earnings and then earnings into free cash flow (FCF), and on that basis, it has been a better buy than Airbus (EADSY +5.19%). However, the reality is the next few years will bring about a unique set of conditions in the commercial aviation market. It's far too simplistic to assume Boeing will outperform its rival, and not least with its stock price. Let's take a look at which stock is a better value.
Order trends
Boeing shareholders were pleased to hear that, for the first time in two years, its net airplane orders were ahead of its rival in the first quarter. However, on closer inspection, the numbers don't look great for either company. Airbus reported 39 airplane orders in the first quarter, but 100 cancellations led to a net order decline of 61. Boeing did much better with 282 gross orders, but a slew of cancellations led to net order growth of just 76 airplanes.
Image source: Getty Images.
That said, Boeing's outperformance on orders in the quarter is probably not a turning point in the battle with Airbus. First, Boeing leaned into one of its most important customers in the quarter, Southwest Airlines, which agreed to buy 100 airplanes with options for an additional 155 in the future. It's a significant order, but it will be difficult to repeat it, not least because Southwest is the largest operator of an all-Boeing fleet.
Also, Southwest Airlines ordered 737 MAX airplanes, and given that the ban on the 737 MAX was lifted late in 2020, it's likely that the orders represented a temporary boost.
Second, as you can see in a comparison of recent yearly orders on the Airbus A320 family compared to the Boeing 737 MAX, Boeing has a lot of catching up to do following the grounding of the 737 MAX.
Data sources: Boeing and Airbus presentations. Chart by author.
Boeing's past outperformance
It's fair to say that Boeing's previous outperformance on margin and FCF generation is factored into Wall Street analyst forecasts. The table below shows the Wall Street consensus on margin. The companies' price-to-FCF multiple will be using the current market price and the consensus FCF forecasts.
It reads well for Boeing investors because Boeing is expected to be generating a higher operating margin and to trade on a lower price-to-FCF multiple by 2023, a year when many forecasters expect air travel will get back to 2019 levels.
| Company/Metric |
2018 |
2019 |
2020 |
2021 Estimated |
2022 Estimated |
2023 Estimated |
|---|---|---|---|---|---|---|
|
Boeing operating margin |
11.9% |
(2.6%) |
22% |
4.4% |
7.7% |
9.8% |
|
Airbus operating margin |
9.2% |
9.9% |
3.4% |
5% |
8.2% |
9.7% |
|
Boeing price-to-FCF |
10.6x |
(36.7x) |
(7.3x) |
(34.9x) |
20.2x |
16.3x |
|
Airbus price-to-FCF |
2466x |
57.6x |
(11.3x) |
115.8x |
23.3x |
18.9x |
Data source: marketscreener.com, author's calculations.
Why Airbus is a better buy
There's a case for buying Boeing as a play on a recovery in commercial air travel, but I think there are two key reasons why Airbus is a better buy.
First, margin progression at both Airbus and Boeing is a factor of ramping up deliveries. This is because the unit cost of an airplane tends to fall as more are being produced. However, to increase deliveries, both companies need to maintain their current order book and generate new orders.
Boeing's problem is that the COVID-19 pandemic hit it when the narrow-body 737 MAX was grounded, and when management was hoping for a replacement cycle in the wide-body market -- Boeing is seen as leading Airbus in the latter. These issues may lead to Boeing having to give steep discounts on orders, and it's tough to predict what its revenue will be in the coming years.
Image source: Getty Images.
Second, Airbus also faces issues with orders and the pricing of orders, and there's a downside risk for both companies if the commercial aviation market doesn't recover as planned. However, Airbus' financial position is a lot stronger than Boeing's right now. In other words, Airbus has more resiliency should anything go wrong.
Due to a combination of the 737 MAX grounding and the COVID-19 pandemic, Boeing's debt has ballooned, and it was slightly more than its revenue in 2020. While there are no questions around Boeing's solvency, the extra debt it took on will burden the company with higher interest-rate payments for many years to come.
Data by YCharts
The bottom line
Airbus is better positioned than Boeing in both an operational and financial sense. There is a case for buying Boeing based on its traditional outperformance, but the next few years will be anything but traditional for both companies. As such, Airbus is a better buy.
