Strong MRO Demand Will Sustain Profitability In Aerospace Leasing

Key Takeaways

• Strong demand in MRO services and leasing boosts MTU's margins and EBIT, indicating sustained profitability in these sectors.
  
• Meeting revenue targets through strong spare parts and lease businesses highlights MTU's operational efficiency and future growth potential.
  
• Ongoing supply chain challenges and macroeconomic uncertainties could impede revenue growth, affecting MTU Aero Engines' margins and earnings stability.

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 ongoing demand for MRO services, particularly for mature engine platforms, and high lease rates are boosting MTU's EBIT, suggesting that MTU can capitalize on sustained demand and pricing power in the MRO sector, potentially improving margins and earnings.
  
• MTU's lease and asset management business, which contributes to higher-than-average margins, continues to support EBIT growth, indicating future profitability enhancements through strategic asset management and leasing activities.
  
• The continued strong performance of MTU’s spare parts business, driven by demand for narrowbody and wide-body platforms, reinforces the company’s ability to meet revenue targets with favorable pricing dynamics contributing to improved net margins.
  
• The anticipated improvements in supply chain issues, specifically in the production of new parts and MRO capacity, could lead to better turnaround times and increased revenue as MTU can service more demand.
  
• MTU's early achievement of its 2025 EBIT target suggests room for further revenue growth and efficiencies, which could enhance net margins and demonstrate operational strength in pursuing future financial targets.

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 10.1% today to 10.3% in 3 years time.
• Analysts expect earnings to reach €997.0 million (and earnings per share of €18.27) by about December 2027, up from €709.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €768 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2027 earnings, down from 24.5x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 35.2x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.63%, as per the Simply Wall St company report.

MTU Aero Engines Future Earnings Per Share Growth

Risks

• Ongoing supply chain challenges could impede MTU Aero Engines' ability to meet demand for new parts and MRO services, potentially impacting revenue growth and increasing costs, thereby affecting net margins.
  
• The reliance on older aircraft and reduced new engine shipments, while benefiting short-term MRO demand, could limit growth opportunities in new engine sales, affecting future revenue potential and long-term earnings stability.
  
• Limited MRO capacity and parts availability may constrain MTU's ability to capitalize on high demand, which could lead to missed revenue opportunities and pressure on earnings.
  
• Potential delays in compensation payments related to the GTF fleet management plan could create cash flow uncertainties, impacting free cash flow projections and working capital management.
  
• Macroeconomic uncertainties, such as volatile exchange rates and changing market conditions, pose a risk to revenue and profit forecasts, potentially affecting earnings growth consistency.

Valuation

• The analysts have a consensus price target of €330.95 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 €405.0, and the most bearish reporting a price target of just €220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €9.6 billion, earnings will come to €997.0 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 4.6%.
• Given the current share price of €322.9, the analyst's price target of €330.95 is 2.4% higher. 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.