Chit Chat Stocks - Fundamental Analysis: Airbus (AIR.PA)

Episode Date: April 26, 2020

On this show we discuss Airbus (the Boeing of Europe). Find out why Brett gave it a rating of 6 and Ryan a rating of 5.  --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome in. This is the Fundamental Analysis Show on Chit Chat Money. My name is Brett Schaefer, and I'm here, as always, with Ryan Henderson, and today we're talking Airbus, a European company, actually listed in Paris, but you can still invest on the OTC markets in the United States. They are the Boeing competitor, so Ryan, do you want to get into what they do and then talk the history of the company? Yep. Airbus is a European aerospace corporation, So they design, manufacture, and deliver commercial aircrafts, helicopters, military transports, satellites, and launch vehicles.

They are headquartered in – is it Lieben, Netherlands? Might be Leiben. Leiben, Netherlands. And they help form basically a duopoly in the aerospace industry, which is through their direct competition with Boeing. They basically do a lot of the same stuff. So a little bit about the history. they here's my problem with these big companies when it comes to the history and stuff like they control the narrative online with what's said yeah i mean wikipedia is whatever but like they

have the whole page they're trying to you know do decade by decade this is the innovations we gone through every year and stuff like that i'm like just yeah so i didn't i didn't pick up all the notes that they had there but airbus was formed in 1970 um the goal was to fill a market niche of short to medium medium range high capacity jet liners in 1972 airbus ran the first flight of the world's first wide body twin engine aircraft since then they had a whole bunch of like oh first flight for this air first flight for this version first flight and all that crap so they've obviously evolved their production and the type of planes that they're putting out um but they went public in 2000 on the paris stock exchange and i don't know if you guys really want

want the history you can go read about it wasn't super fascinating yeah then i'll get into the valuation what really everyone cares about and that is they have a market cap of 42.4 billion dollars ticker is air.pa that is a paris listing they also have i think it is eadpy for the otc markets in the united states but just look up the company and you'll be able to find it their stock price in the united states is 52 and 30 or no not united states i think that's the european listing but whatever it's 52 and 34 cents as of april 25th 2020 when we're recording this all these financials are very volatile though because they do have a lot of industry things that are going on with the travel industry and you know fair warning they could change rather

quickly especially in these time periods their ford pe is 14.5 their price to sales is 0.6 um trailing though they have these fines uh that have hurt profitability what was it almost four billion euros this year yeah uh four or ev to evita is 9.25 trailing dividend yield is 3.32 percent which is very strong negative six billion in working capital that is mainly from current liabilities of contract and trade liabilities so they have a lot of contracts they have to fulfill those are liabilities but technically i bet those are very long or no those are current ones that they have to fill so that's kind of important and then their trade liabilities i'm not sure exactly what that is but they are pretty big and that's why they have that negative working capital number

they have less than 10 billion dollars in financing debt though which is not too bad compared to their cash flow i'd be surprised if they didn't take out some debt though yeah they probably will if business slows for the next uh few i mean months or maybe even a year or so yeah Yeah, and I know a lot of the airlines are in – like these are long-term contracts with customers for Airbus. So the airlines basically sign these contracts saying we're going to take delivery of this many planes over this much time. I don't know if they can go back on that, but I don't think the airlines have a whole lot of money to spend right now. So I'll dig into the earnings though. Full year 2019 revenue was $76.4 billion, up 11% year over year, and obviously this is pre-corona impact.

14.5% of the top line came from the defense segment. Adjusted EBIT was $7.5 billion, up 19% year-over-year. It's very important that you hear that right. It's adjusted EBIT because reported EBIT was $1.4 billion, which is actually down 73% year-over-year, and that is primarily due to the $3.9 billion fine due to the allegations of bribery and corruption with jetliner sales. Oh, really?

It's been like a four-year thing that they've been digging into it, and apparently it is the biggest incident of bribery ever. Wow. According to anti-corruption experts, that's what I saw. So, yeah, not great. Definitely not a good look for them. They had to restructure management because of it, but I'll get into the rest of the numbers. net commercial aircraft orders increased to 768 aircrafts up from 747 2018 3.8 billion in consolidated free cash flow decent number there 13 and a half billion in net cash and they

increased their dividend to a dollar 95 up nine percent year over year so aside from the fines which are real expenses relatively solid year revenue up 11 percent adjusted ebit up around 20 and free cash flow i wasn't i think that was down year over year but altogether looks decent aside from and it feels like to me it feels like this is a business that has a lot of one-time expenses that aren't one time like they classify them as one time and they always have one time every year but when you look into it you're like well if you're always having these one-time expenses is are they actually one-time expenses or should they be included um into the earnings statement And if you look at those numbers, though, the adjusted numbers versus the market cap, it's actually very strong.

And the valuation looks to be quite low. Yeah, yeah, exactly. Welcome back. Next up is the second half of the show, and that means digging trenches, which is just the moat rating, 0 through 3. I guess if we want to explain it for any new listeners, 3 is, like, super strong you would invest in. And zero means they have no moat, and it's probably something to be concerned about. And one of the two is like, eh, it's kind of just whatever. It's probably not something to be concerned about or to invest in.

So what do you think about with Airbus? Yeah, so when you think of sort of the traditional metrics that establish a moat, is the industry expensive to get into? Like can it be disrupted by a startup? Aerospace, they cannot. Well, it's possible. It's tough. It's tough. Very capital intensive.

So that part they check. And then as far as market share and competition, I have a number that I'll talk about later on, but I saw that they had 62.5% market share in 2019. Obviously, that was due to a huge collapse in orders from Boeing's side because of the 737 MAX issues. but it's basically a duopoly in the aerospace industry so i'm gonna go with a two because you're either taking you're either buying from airbus or buying from boeing yeah and there it's things get political you know sometimes the american companies uh maybe two and a half yeah i think it honestly be more two and a half um it's not something you like boeing and airbus would i invest in either of those companies i mean at this point maybe you just can't give them a three when it's obviously a duopoly like it because there is you know there is an alternative it's yeah it is and there's nothing they can really specialize um the the tech is very very

similar and it takes years and years which it takes you know a long time for competitors to get in but it's really hard to differentiate yourself you don't know and you can't really tell whether you have an airbus versus a boeing maybe pilots can tell but that's not the core audience and that's why the pricing power similar to someone like i know the classic example is uber lyft um it's it's kind of tough but let's get to the next segment here and that is further reading what are you looking at uh if you were going to invest in this company what would you want to further yeah so um supply chain is the thing i need to look into so they have over 1500 suppliers So, A, I want to know how reliant are they on them? How many of these suppliers are the only single company that can supply a certain product? Let's say they have a patent around a little screw that goes into a wing or something. You know what I mean?

um so if they are exclusive what would vertical integration so let's say they acquired i know this happened um i think it was a few weeks back airbus acquired a supplier that supplies to both boeing and airbus but obviously they don't supply to boeing anymore when you buy them how does that um how does that disrupt the competition as far as uh your competitors supply chain i'm curious what what the inner workings that's why they have these huge supplier relations departments at these aerospace companies is because it's so important and that is really where the value is made yeah and it it can impact you i mean if it goes down you know the whole thing gets ruined you know just in time manufacturing uh the whole plane can get backlogged uh for like six months

or something delayed for six months and that could totally crush their financial statements i'll get into mine though they have i mean they have a really tough financial statements uh and i'm not saying that it's sort of like a bank where you look at it and 50 of the things you're looking at there's a ton of it and it's really hard to read um you're not seeing the typical things on a balance sheet there's like 50 lines sometimes on these adjusted things if i was going to invest in it i want to know out of the three main sheets operating cash flow uh statement or whatever revenue statement and earnings statement and then the balance sheet i want to make sure i know what everything means on those before i invest because if there are concerns um and i you know i don't

know anything maybe i'm overlooking something and that's just not something i want to invest in it looks really easy for them to mask certain expenses or certain numbers or hide it in a different spot on the balance sheet because there were so many different adjustments there was the adjusted ebit there was net cash provided by or it was a weird net cash number that i was like all is this straight liquid i couldn't really understand it um there was just some wording that kind of tricked me and then on top of it it isn't euro so you have to go through the process of converting everything yeah well that's just a little bit of busy work yeah um what do you have for future growth opportunities well it's it's tough for this business i mean because really

it's defense and then aerospace or airplanes and i guess defense segment could be a growth opportunity and makes up 26 of revenue and it's not you mentioned probably a more specific part of it i'm including helicopters as well so i think they have a bigger helicopter segment than boeing because they mentioned it like three or four times in the earnings statement um they are probably less cyclical than airplanes and i'm mentioning this as the defense is probably more cyclical than airplanes and i would think unless world peace happens anytime soon which i don't think uh will happen uh there's going to be demand for these things there's going to be demand from all the top countries in the world for the new tech and if airbus can keep doing that that could

be a solid growth opportunity for them that is going to be a lot more reliable than the travel industry yeah um and my future growth opportunity here is just taking market share in this sort of time of uncertainty and especially at a time when your main competition is struggling um i could have probably come up with some other one but i have no engineering background and maybe there's some like new planes that they're or jets that they're introducing but i wouldn't be able to tell you how profitable some of those things would be um but their order intake increased 46 percent year over year in 2019 so and that is much faster than their growth before i and that because it's probably because the the 737 max is out of commission um and there's all those delays

with boeing so people like oh we needed these planes maybe they don't need now uh but that's they had to go to the only other option yeah and if you're measuring market share based on deliveries airbus had like i mentioned 62 and a half percent market share in 2019 uh this is as good of a time as any to try to lock in some of those customers on long-term contracts and get them exclusive or getting get them away from boeing um and it as sad as it is it's a good time to capitalize on boeing struggles yeah i mean well because boeing's going to lose probably a lot of leverage i think in some of those uh argument or contract deals because airlines are saying you know you owe us we didn't get this all that stuff so they're gonna have a

little less leverage in those contracts i think that's a good chance for airbus to swoop in yeah it's a win it's not a win-win market it's a win-lose market it's uh right it's not you know whatever boeing loses that's airbuses to gain there's no other competitors out there i'll get into the highlights and lowlights though my highlights there's no competitors besides boeing as we've mentioned a few times uh boeing is doing very badly which is also good for airbus and historically this has been a steadily growing industry over the long term uh you know the next few years here we might be up in the air lowlights though they are impacted really greatly behind the global travel market and it is absolutely decimated down like 90 percent here and it probably will be

for the next i don't know six months at least and it won't get back to full capacity for likely the next i mean until probably until we get a vaccine but that that's speculation and then it's also tough to get around how much growth there is unless the defense segment really really picks up but that is not the majority part of their business the majority part the airplanes it's tough to see if there's just an infinite amount of growth there definitely is not right um and my my highlights uh are sort of similar well okay so i'll go to my low lights first airplane manufacturing is a tough business it's super asset intensive airbus employs 135 000 workers there's a lot of employees that you have to have in order to run a business like this also management participated in the largest

bribery case ever so and are they still there so they during their management overhaul they hired a new ceo but he was from inside the business he was the president of their commercial aircraft business so you have to go with an outsider there like red flag it's like wells fargo like you you think this guy had no idea that all this was going on i'd be very surprised um so yeah that's a massive red flag for me although i will say they have the long-term contracts uh allow for stable cash flow in terms of what's coming in i guess the cost structure might be a little different and especially if you're paying four billion dollars in fines but um it's consistent revenue you know what's coming in because you have this backlog um so it's pretty easy to tell and you can kind

of look at that and it's also kind of developed them a pretty solid moat like we talked about and there's probably a very low chance aerospace will be disrupted by some sort of startup which so those things are all good but there's so many low lights for me and maybe this this will tailor into my rating yeah go ahead and start with the rating you we as an investor as an individual investor you have the luxury of being able to pick what you want so if it was like do or die between boeing and airbus right now i'd probably pick airbus but i don't have to pick anyone in the aerospace industry and that's exactly what i'm going to do i i want to avoid this space i would much rather have a business that's asset light someone like a mongo db who isn't as cyclical

not as affected not as not as much government involvement um you you get unlimited pitches and you don't have to swing at any of them so i'm not going to take airbus i'd probably go five they do have a decent valuation but yeah the the valuation um yeah it seems nice uh this seems like a business that a hedge fund would probably go after you know like one of those activists someone that's way smarter than us a lot more experience you can understand how the business works even though it's one of these really really complicated businesses like a bank or a car manufacturer or things like that uh but because you could also you get the valuation bump um and then you could also probably get some earnings power if things stabilize they're going to win

some stuff over boeing and that could be great um and i think airbus honestly at a 40 billion dollar market cap there's a chance it could be a great investment but i don't know enough about the business i can't understand it enough the financials so i'm gonna go similar i think i'm gonna a little more bullish though i think i'm gonna go six uh definitely not getting close to where i'd pull the trigger though i you know we both run uh concentrated portfolios run or just have individual accounts of about 12 to 15 companies maybe even a little less and this really doesn't make a cut we like asset like light we like smaller cap um and this is not really going there so yeah six for me five for ryan yeah one more this goes to the too hard pile

for me there's i mean it would take months to figure out the entire business and then there's certain like tiny things as far as like supplier relations that you have to go into you have to go through that entire supply chain to figure out what value what part could be disrupted um if like a supplier you know god forbid something happened that that messed up their business how to impact them so there's just a lot of things that would take time to figure out and there's no way i'd be investing right now yeah and then there's red flags on management you got red flags on politically they're politically they're politically driven and they're also economically driven the travel industry um is really up in the air right now uh so there's just quite a few red

flags with airbus but that's probably why they have that low valuation that's going to do it for this episode though thank you guys for listening make sure as always to follow us on twitter at chit chat money and email us chit chat money podcast at gmail.com remember we are not financial advisors anything we say on this show is not formal advice or recommendation thank you guys for listening we'll see you next time Thank you. Real Canadian Superstore has everything you need this back-to-school season. Save on lunchbox savers like Ziggy's sliced deli meat products for always $3.75.

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