Raising A320 Production And Strong Backlog Will Improve Future Aerospace Operations

Key Takeaways

• Airbus aims to increase production rates in Commercial Aircraft, leveraging strong order backlogs to boost revenue and ensure growth.
  
• Defense and Space transformations target restored competitiveness and profitability, aided by anticipated easing of inflation impacts by 2025.
  
• Geopolitical uncertainties, supply chain challenges, and inflation threaten Airbus's delivery targets, revenue, and margins, while reliance on end-of-year deliveries heightens financial risks.

Catalysts

Engages in the design, manufacture, and delivery of aerospace products, services, and solutions worldwide.

• Airbus plans a significant production ramp-up in Commercial Aircraft, aiming to reach a monthly rate of 75 A320s by 2027, and rate 14 for the A220 by 2026. This is expected to boost revenues significantly as output increases.
  
• There is a strong order backlog in the Commercial Aircraft segment, with a record level of 8,749 aircraft including 7,253 orders for the A320 family. This high demand provides visibility for revenue growth in the coming years.
  
• The delivery of the first A321XLR to Iberia introduces a new product with unique capabilities, potentially capturing additional market share and increasing revenues.
  
• Transformation initiatives in the Defense and Space division aim to restore competitiveness and profitability. Successful execution of these plans could improve net margins over time.
  
• Inflation impacts are expected to decrease into 2025, potentially improving net margins and overall cost structures, positively influencing future earnings.

Airbus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Airbus's revenue will grow by 11.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 8.2% in 3 years time.
• Analysts expect earnings to reach €7.5 billion (and earnings per share of €9.75) by about December 2027, up from €3.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €5.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2027 earnings, down from 37.8x 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 decline by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.03%, as per the Simply Wall St company report.

Airbus Future Earnings Per Share Growth

Risks

• Geopolitical uncertainties and supply chain challenges, particularly in narrow body engines, could impact Airbus's ability to meet delivery targets and therefore affect revenue and profit margins.
  
• The company's defense and space division continues to face competitive and disruptive environments, which have resulted in substantial charges and could challenge future earnings stability.
  
• Airbus's free cash flow is currently negative, and the heavy reliance on end-of-year deliveries to meet forecasts may pose risks if any disruptions occur, impacting annual earnings projections.
  
• Inflation remains a considerable factor, with expectations of several hundred million euros impact on costs, which could compress net margins if not offset by increased efficiencies.
  
• Transitioning certain programs amidst acquisition-related negotiations (e.g., with Spirit AeroSystems) could involve execution risks that might negatively influence short-term profitability.

Valuation

• The analysts have a consensus price target of €164.82 for Airbus 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 €187.0, and the most bearish reporting a price target of just €109.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €92.1 billion, earnings will come to €7.5 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 5.0%.
• Given the current share price of €156.24, the analyst's price target of €164.82 is 5.2% 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.