Has The 737 MAX Clipped Boeing’s Wings? Is Airbus A Better Pick?

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BA: The Boeing Company logo
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The Boeing Company

We believe that Boeing (NYSE: BA) is currently a better pick over Airbus (OTCMKTS: EADSY), given its attractive valuation. Airbus trades at a higher valuation of 1.9x trailing revenues, compared to 1.4x for Boeing. This gap in valuation can be attributed to a 30% fall in BA stock this year, amid ongoing issues with its 737 MAX aircraft. In contrast, Airbus stock has risen 3% this year. Also, Airbus’ superior profitability and financial position also explains some of the valuation gap in these companies. In the sections below, we discuss why we think BA will outperform EADSY in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. The Ongoing 737 MAX Issue

There was an incident in which the cabin side panel detached midair on Alaska Air (Boeing 737 Max 9) flight 1282 on January 9, 2024. Following the incident, the Federal Aviation Administration grounded Boeing 737 Max 9 aircraft. Later, in February, one of Boeing’s suppliers found a new problem with fuselages on several unfinished 737 Max planes. These incidents have resulted in uncertainties and a delay in deliveries. Boeing failed in 33 of 89 product audits conducted by the Federal Aviation Administration (FAA) on 737 Max airplanes. [1]  The fuselage is made by one of Boeing’s suppliers — Spirit AeroSystems. Boeing plans to acquire Spirit AeroSystems to address the quality issues and get on track for its 2026 production target of 50 airplanes a month.

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With mounting pressure on the ongoing 737 MAX issue, Boeing CEO – Dave Calhoun – will step down by the end of this year. The CEO of GE Aerospace (NYSE: GE) – Larry Culp – was approached to head Boeing, but he declined the offer. [2] Amid increased scrutiny, Boeing failed to capture any order for 737 MAX in the past two months. Note that the FAA has imposed a cap of only 38 jet deliveries per month by Boeing, and this may remain in effect for a few months.

2. Airbus’ Stock Has Fared Much Better Than Boeing

BA stock has seen a decline of 20% from levels of $215 in early January 2021 to around $175 now, vs. strong gains of 60% from $25 to $40 for EADSY. This compares with an increase of about 45% for the S&P 500 over this roughly three-year period. However, the change in BA and EADSY stock has been far from consistent. Returns for BA stock were -6% in 2021, -5% in 2022, and 37% in 2023, while those for EADSY were 17%, -7%, and 30% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that BA and EADSY underperformed the S&P in 2021.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including CAT and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BA and EADSY face a similar situation as they did in 2021 and underperform the S&P over the next 12 months — or will they see higher levels? While we think both stocks will trend higher, BA will likely outperform EADSY after its sharp decline.

3. Airbus And Boeing Have Seen Similar Revenue Growth, But Airbus Is Far More Profitable

Boeing has seen its revenue rise at an average annual rate of 10.3% from $58.2 billion in 2020 to $77.8 billion in 2023. Similarly, Airbus has seen its sales rise at 9.5% average annual rate from €49.9 billion to €65.4 billion over the same period. There is a massive demand for new aircraft with a rise in global travel, and this trend is not going to change anytime soon. The aircraft manufacturers record most of the revenue upon the time of delivery and amid the FAA cap on Boeing, its 2024 sales growth may take a hit.

Boeing has reported losses in all years since 2019. Its reported operating margin stood at -22.3% in 2020, given the impact of the lockdowns, and it has since improved to -1.1% in 2023. On the other hand, Airbus’ operating margin has expanded from 1.3% to 6.5% over the same period. Looking at the bottom line, Boeing’s loss narrowed from $20.88 in 2020 to a loss of $3.67 per share in 2023, while Airbus posted a loss of €0.36 per share in 2020 and a profit per share of €1.20 in 2023.

Looking at the financial position, Airbus fares much better, with its 9% debt as a percentage of equity lower than 49% for Boeing, and 16% cash as a percentage of assets higher than 12% for the latter. This implies Airbus has a better debt position and more cash cushion.

4. The Net of It All

We see that Airbus has seen a similar revenue growth as Boeing, but it is more profitable and has a better financial position. Now, looking at prospects, we believe BA is the better choice of the two, given its attractive valuation. At its current levels, BA stock is trading at 1.4x trailing revenues, versus the last four-year average of 1.9x. On the other hand, Airbus’ stock is trading at 1.9x revenues, versus a 1.8x average over the last four years. Our Boeing Valuation dashboard has more details.

While some of this decline in P/S multiple for Boeing makes sense, given the ongoing 737 MAX issues, we think the negatives are largely priced in now. Boeing is focused on improving the quality and is producing fewer 737 aircraft. Boeing’s ongoing issue doesn’t necessarily mean gains for Airbus. The demand for new aircraft is massive, and both Airbus and Boeing have customers lined up for all the airplanes they will make over the next several years.

For perspective, Boeing’s backlog is over 5,600 planes while that for Airbus is of over 8,600. Furthermore, pilots and engineers are trained on one type of aircraft, making switching to a different aircraft difficult for carriers. Also, the contracts between the carrier and manufacturer are usually for long-term and difficult to break. We think that the ongoing issue is transient and Boeing will emerge on the other side stronger with continued focus on expanding its monthly deliveries. This, in turn, will improve its financial metrics, including sales growth, profitability, as well as the financial position.

Overall, long-term investors will likely be better off picking BA in the current dip for robust gains in the next three years. While BA may outperform EADSY in the next three years, it is helpful to see how Boeing’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 BA Return -1% -33% 12%
 EADSY Return -7% 3% 142%
 S&P 500 Return 4% 15% 144%
 Trefis Reinforced Value Portfolio 4% 8% 666%

[1] Returns as of 6/19/2024
[2] Cumulative total returns since the end of 2016

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Notes:
  1. F.A.A. Audit of Boeing’s 737 Max Production Found Dozens of Issues, Mark Walker, The New York Times, March 11, 2024 []
  2. Boeing’s CEO Search Hits Some Snags, Emily Glazer and Sharon Terlep, The Wall Street Journal, June 17, 2024 []