GTF Advantage Certification And Military Contracts Will Drive Future Opportunities

Key Takeaways

• MTU is positioned for revenue growth with increased aircraft demand, MRO services, and significant contract wins boosting market share and earnings.
  
• New Eurofighter orders and the GTF Advantage program promise steady income and expanded product offerings, enhancing long-term revenue stability.
  
• Management turnover, supply chain delays, cash flow volatility, and dependence on the GTF program strain MTU's profitability and financial flexibility.

Catalysts

Engages in the development, manufacture, marketing, and maintenance of commercial and military aircraft engines, and aero-derivative industrial gas turbines in Germany, other European countries, North America, Asia, and internationally.

• The strong forecasted growth in passenger (8%) and cargo (6%) traffic for 2025 by the IATA, combined with ongoing high demand for new aircraft, positions MTU to benefit from increased sales of spare and lease engines, which can bolster revenue growth.
  
• Increased demand for maintenance and spare parts due to airlines extending the service lives of older aircraft and supply chain constraints providing pricing opportunities in MRO services could enhance MTU's net margins through improved pricing power and higher utilization of limited MRO capacities.
  
• The GTF Advantage program, which is expected to receive final FAA certification in H1 2025, indicates a pipeline of future engine deliveries and associated revenues. This could also improve earnings as product offerings expand.
  
• Recent contract wins totaling USD 5.6 billion in the commercial MRO sector demonstrate MTU's ability to secure significant business, which is likely to continue driving revenue growth and expanding market share, thus impacting earnings positively.
  
• Growth in the Military business due to new Eurofighter orders and development work on the New Generation Fighter Engine promises long-term steady income streams that could positively influence MTU’s overall revenue and provide stability to earnings.

MTU Aero Engines Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MTU Aero Engines's revenue will grow by 11.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 10.5% in 3 years time.
• Analysts expect earnings to reach €1.1 billion (and earnings per share of €18.97) by about March 2028, up from €642.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.2x on those 2028 earnings, down from 29.0x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 31.3x.
• Analysts expect the number of shares outstanding to grow by 4.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.97%, as per the Simply Wall St company report.

MTU Aero Engines Future Earnings Per Share Growth

Risks

• Management turnover poses a risk, as both the CEO and CFO are set to change, potentially leading to strategic realignments and disruptions. This could affect MTU’s strategic execution and operational efficiency, impacting profits and overall financial performance.
  
• Ongoing supply chain challenges are leading to delays in aircraft deliveries and elevated turnaround times for Maintenance, Repair, and Overhaul (MRO) services, which can result in increased working capital requirements, impacting cash flow negatively.
  
• The volatility in free cash flow highlighted by the significant impacts of the GTF fleet management plan, including cash payments to airlines for fleet management, puts pressure on MTU’s liquidity position, limiting financial flexibility.
  
• Dependence on the GTF engine program, which involves upfront costs and deferred payments, can strain MTU's revenue recognition and working capital over time, affecting short-term profitability and earnings.
  
• Potential reduction in leasing revenue and a normalization of leasing rates in the Asset Management business could decrease MTU’s profitability if not compensated by other revenue streams, impacting margins and earnings growth.

Valuation

• The analysts have a consensus price target of €342.684 for MTU Aero Engines based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €430.0, and the most bearish reporting a price target of just €245.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €10.2 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 5.0%.
• Given the current share price of €346.0, the analyst price target of €342.68 is 1.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.