Airbus Is a Steady Stock for Turbulent Times. Why It Could Soar 35%.
Airbus is ready for takeoff. Investors in the European aerospace company could see gains of more than 35% over the next 12 months as the company boosts production amid surging demand, analysts say.
“Airbus is on a very strong growth trajectory regardless of a recession and postpandemic normalization,” says Colin Scarola, an analyst at financial research company CFRA. He sees the stock (ticker: AIR.France) rising to 140 euros ($143) over the next year, up 35% from its recent level of €104. Plus, the stock yields a 1.4% dividend currently. U.S.-based investors could consider buying the American depositary receipts (EADSY.)
The company on July 27 reported better-than-expected first-half profits. Despite the improving profitability, the stock has followed the broader market down. The shares have lost about 8% this year, roughly in line with the performance of the Paris CAC 40 index, which tracks leading French-listed companies.
Still, the pullback has made the shares cheap relative to projected income. They were recently trading at 21 times forward earnings, according to data from Morningstar . That is lower than the five-year average of 24.
During the earnings announcement, Airbus slashed its target 2022 production to 700 commercial aircraft from 720 previously. “In the short term, the current supply-chain challenges lead us to adjust the ramp-up steps in 2022 and ’23,” said CEO Guillaume Faury on the earnings call. The company now expects to produce 65 planes a month in early 2024, later than originally expected.
However, Airbus is maintaining its long-term target of producing 75 of its A320 model aircraft a month by 2025, up from 60 monthly before the pandemic. “Going up to 75 might sound aggressive, but it’s in line with production increases we’ve seen from Airbus before the pandemic,” Scarola says. Plus, China’s three biggest state-owned airlines recently agreed to buy 300 planes from Airbus.
Scarola doesn’t see aircraft demand slipping despite the increasing likelihood of a global economic slowdown. “We are currently at a depressed level of aircraft deliveries relative to global GDP,” he says. “Even if we go through something worse than the financial crisis, I think Airbus deliveries have to climb about 40%.”
“The biggest risk to their positioning today is the cost issues,” says Allegra Dawes, an analyst at financial research firm Third Bridge. All manufacturers, especially those in Europe, are suffering from the considerable jumps in commodity prices, especially the surge in energy prices since Russia’s invasion of Ukraine.
Despite a recent pullback in prices, energy-heavy aluminum was about 36% more expensive recently than it was before the pandemic. That is a key concern, given that aircraft fuselages are largely made with aluminum. “To a certain extent, Airbus will be able to mitigate a lot of the cost issues with price increases,” Dawes says.
There are real and potential supply threats for any manufacturer securing titanium, a metal used in aircraft construction, especially for engine components. Russia, which has restricted exports of some key commodities, is the third-largest producer of the metal.
“We see a shift away from Russia for sourcing, but some processing of specific parts will take a little longer,” Dawes says.
Meanwhile, China is the largest titanium producer, controlling more than half of the world’s supply. Unfortunately, relations between the communist country and the West are deteriorating fast. Depending on how tense things get with China, the supply problems could get even worse.
Still, on balance, the potential upside for Airbus outweighs the possible risks.