Why you should invest in AIR.PA AIRBUS GROUP in 2020 long term!
April 16, 2020
Dear Bulls, though lot of companies are losing some of their market value on short term during this market selloff, some company's future remains strong and this is great opportunity to buy these businesses at a discount.
Today we will share some gem tips and reasons why we remain bullish on AIR.PA (AIRBUS GROUP) the second largest aerospace and defence company in the world, which has lost EUR 50B of its value during covid-19 coronavirus pandemic and economy crisis:
a) The key on this investment compared to any other on the aviation or travel industry is that its business is not as cyclical as the others are. If look on the attached image at graph 1, we can see the dark vertical blue bars which represent the amount of planes delivered, what drives the company's profit, and therefore the stock price. This can sound evident, but it's worth to think about it.
The blue line shows the orders. When an airline orders a new plane, it's part of a long term expansion strategy, not something that is done immediately, and some of these orders are looking 10 years ahead. This is known as the backlog, shown with the grey-blue colour, which currently stands at 7.670 planes. This means, if we compare it to 2019's 863 deliveries, that they have enough orders to keep producing planes for almost 9 years! Even if they didn't get any new orders. Looking at the previous 2008 crisis, though orders fell to historic lows, plane deliveries kept growing and growing, which shows how a strong player during crisis times this is.
b) Graph 2 shoes how the air traffic has surged dramatically during the last decades. This is measured on RPKs (revenue passenger kilometres), and the forecast is that it will double on 15 years. Because of the current virus situation, we are likely to see a drop this year, but this will be something temporarily, and passengers will fly again, like it's already happening at countries like China, where the virus is starting to be controlled and air traffic is already starting to increase.
c) Airbus has been a great investment, which compared to the return of the US index SP500 and the European index, had nearly 4X them, and the recent market sell off has thrown this company to some low levels where it's a really attractive investment. Despite this, if you had invested your money on this company 10 years ago, your return would be a 231%
At its peak, the return was an astonishing 750%. It's also a company most of you are familiar with, so gives you the chance to invest on something you can easily understand.
e) The trend on aviation now is to look for more fuel afficient planes, which are so called narrow body planes, which are more cost effective and environment frtiendly. Airbus is the market leader with its A320 plane series, the most fuel efficient planes in the world, and its rival Boeing has been unable to compete against it with the failed 737max, which is currently grounded after the 2 fatal accidents.
Airbus has done a lot of spending on capex and I+D to design these planes, which is a task that take years, and now is going to benefit from higher margins with them. Forecasts for 2029 is that almost all the new orders will be narrow body aircrafts, doubling the amount of current planes of this type, and Airbus will be the main beneficiary from this.
f) Plane manufacturers is absically a duopoly between BA (Boeing) and Airbus, and is a duopolly with very high barriers to entry, as you need a massive initial capital investment and at least 10 years to start seeing so return back, and you also need the certification from lot of third parties for your planes to be granted for use.
The graph shows the return of different sub sectors inside the aviation world, being manufacturers the 2nd biggest, only surpassed by GDS companies, like AMS.MC (Amadeus IT Hold -A-). This makes Airbus a safer investment than airlines companies like Ryanair, EZL.L (easyJet), DAL (Delta Air LInes Inc (DE)), AAL (American Airlines Group Inc), LHA.DE (Deutsche Lufthansa Aktiengesellschaft) or LUV (Southwest Airlines Co), which have much more competition.
The short term situation is impeding some investors to think about long term prospects and are pricing in that the company will stay flat or have decreasing production forever.
The company also has a much better cash and debt position than its rival Boeing, whcih will help the company withstand this short erm issues. Some orders might be cancelled and of course the company will be affected in some way, but the market is over reacting to this as we know this is not so much a cyclical company. Also, because of the main play it has a defence, governments have expressed its will to provide for any loan the company may need.
Trading at a 11 forward PE ratio, this can consititute one of the best investments currently out there on the market, and We expect it to climbb back to its previous levels on around 4 years, which would mean more than 2X your money. We always advise to invest carefully and use divcersification, and make your own studies on companies, but this is one worth double checking.