If you are thinking of buying stock in airplane manufacturers like Airbus (EADSY +2.10%) or Boeing (BA +1.48%) at the moment, you probably assume that commercial air flights will get back to 2019 levels around the 2023 timeframe. That's how many leading industry figures see matters developing.
Given that scenario, it's likely that the demand for new airplanes will pick up, leading to higher production rates -- and ultimately higher margins and profits.
That said, which of the two leading airplane manufacturers is the better recovery play? Let's take a closer look.
Image source: Getty Images.
Boeing vs. Airbus
On a historical basis, or at least before the 737 MAX debacle hit Boeing in 2019, Boeing has tended to generate higher margins and significantly better free cash flow (FCF) than its European rival.
That's something that might well encourage investors to favor Boeing as a recovery play. The argument is that a recovering commercial aviation market will lead to more orders and production. As production increases, so should margins, because airline manufacturers tend to reduce their unit costs of production as they build more planes -- an assumption built into financial modeling. Given that Boeing has been better than Airbus on these matters in the past, it figures that investors might favor Boeing.
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Boeing and Airbus valuations
Indeed, Wall Street analysts have priced in a significant improvement in Boeing's earnings before interest, taxation, depreciation, and amortization (EBITDA) margin expectations. As you can see below, analysts have Boeing's margin recovering strongly by 2023.
Focusing on the 2023 timeframe, the consensus is for Boeing to generate $9.5 billion in FCF in 2023, compared to 5.1 billion euros for Airbus. These figures would put Boeing at a price-to-FCF multiple of 14.5 in 2023, and Airbus at a multiple of 16.3 times FCF. Both valuations use the current market caps.
Data source: marketscreener.com, author's analysis. Chart by author.
Based on these figures, both stocks are attractive. After all, if the 2021-2023 period is the initial recovery phase leading to a resumption of Boeing and Airbus's mid-single-digit percentage revenue growth rates from the decade before the COVID-19 pandemic, https://financials.morningstar.com/ratios/r.html?t=0P00009WFE&culture=en&platform=sal then those price-to-FCF multiples look very attractive. Moreover, as commercial flights come back, airlines will start ordering again, and the narrative around the stocks will turn positive. For example, Southwest Airlines has already ordered 134 Boeing 737 MAX airplanes this year, and United Airlines recently announced its largest-ever order for 270 airplanes (200 Boeing 737 MAXs and 50 Airbus A321 NEOs).
Furthermore, given that Boeing is forecast to trade at a lower FCF multiple than Airbus in 2023, it looks like a better value.
Case closed? Buy Boeing? Unfortunately, it's not that simple.
Boeing and Airbus need commercial air flights to come back. Image source: Getty Images.
Boeing is riskier
The case for buying Airbus over Boeing rests on the idea that there's a lot more risk to these estimates with Boeing. Analyst estimates are fine, but they are contingent on the underlying development of the businesses. And, unfortunately, the COVID-19 pandemic has created several challenges for Boeing.
First, the 737 MAX grounding was an issue in itself, but the COVID-19 pandemic tipped the market from being a supplier's market to a buyer's market. As such, there are question marks around the kind of pricing concessions that Boeing may have to give away to sell 737 MAXs to fill production slots.
Second, Boeing's plans for a new midsize airplane (NMA) dubbed the "797" have been pushed back by the pandemic, and that's allowed the Airbus A321XLR to steal a lead in the marketplace for long-haul single-aisled airplanes.
Third, the general expectation is that domestic flights will return quicker than long-haul international flights, which means the narrow-body market will return earlier than the wide-body. That's a problem for Boeing, as management had previously pinned its hopes on a wide-body replacement cycle beginning at the start of this decade, being driven by its new 777X.
Image source: Getty Images.
Boeing or Airbus?
All told, gazing into the crystal ball for 2023, the risk around Boeing is that revenue and profitability could fall short of expectations due to pricing concessions on the 737 MAX, while Boeing could find itself without a viable NMA. Also, its 777X airplane might not be profitable over the long term relative to expectations.
While these concerns don't necessarily mean you should avoid Boeing stock, given the choice the two, they are enough to make Airbus the better buy.
