Investment Thesis: A resurgence in appetite for aircraft orders along with a low P/E to earnings ratio could mean a significant upside for this stock going forward.

At the end of 2019, I made the dispute that Airbus SE (OTCPK: EADSY) may see limited benefit in the future.

My reasons for making this argument included potential overvaluation on an EV/EBITDA basis, as well as the discontinuation of A380 production at the time and potential delays in bringing newer models such as the ‘A320neo.

Amid heavy pressure on the aviation industry over the past two years due to COVID-19, Airbus has seen an overall decline since 2019 despite recovering in the meantime:

More recently, with fuel prices becoming more expensive and factors such as staff shortages and airspace closures between Russia and the West increasing the cost of operations for commercial airliners, this has also led to a recent drop in the stock.

That being said, I would argue that Airbus SE may actually be trading at discounted levels and the growth outlook may make the stock a potential buy at this point.

Stock and quick ratio analysis

Airbus’ business model is quite simple – the more planes it can sell to potential customers – the higher the company’s sales and, ultimately, its profits.

Of course, it stands to reason that during times of uncertainty for the airline industry, airlines are more reluctant to commit to new fleet orders, as lower than expected demand may not justify expenses.

To get a better picture of Airbus’ inventory turnover over the past few years, I decided to gather quarterly data on inventory and cost of goods sold from the company’s previous financial statements.

Here is the data gathered (where cogs = cost of goods sold):

By taking the total cost of goods sold for each particular year and dividing it by the average inventory over each period of the year, the following inventory ratios were calculated:

From this, we can see that while revenue is up from 2020, it has yet to reach the levels seen in 2018 and 2019.

Looking at the average inventory, we can see that the increase in the ratio over the previous year resulted in lower average inventory held by Airbus, as opposed to increased sales:

Despite the decline in inventory turnover, Airbus still managed to maintain a healthy cash position – with a company quick ratio above that seen in 2018 and 2019:

Source: Figures taken from previous historical financial statements. Quick ratio calculated by the author.

Looking forward

With an airline industry still unstable despite the recovery in air passenger traffic coupled with macroeconomic concerns related to inflation, it is likely to be several more years before we see inventory turnover once again reach the levels of before 2020.

That being said, a visual analysis of earnings per share shows that EPS has rebounded to a 10-year high, while the P/E ratio is trading at levels seen between 2014 and 2016.

In this regard, it is possible that the stock suffered an excessive decline due to broader bear market sentiment.

Also, although inventory turnover has been lower – I wouldn’t consider it an undue concern if Airbus has exercised careful cash management in the meantime – which appears to have been the case.

Additionally, with higher operating costs likely to be a concern for commercial airliners over the next two years – it is entirely possible that the market for narrow-body aircraft will be more in demand than that of wide-body aircraft – as air passengers might choose to prioritize short airliners – carry over long-haul trips for cost savings.

For example, easyJet (OTCPK:EJTTF) recently agreed to buy 56 Airbus A320neos for a list price of $6.5 billion, while Air India is set to order 200 new planes in what would mark the biggest company order since 2006. With 70% of these orders expected to be narrow-body jets – such an order could significantly boost Airbus sales growth, which would also likely increase overall inventory turnover .

While the airline industry is still on shaky ground, large airliners are clearly gearing up to upgrade their existing fleets, and the demand for narrow-body aircraft will play a major role in this endeavour.

If we see order demand continue to rise in the future, I think it’s plausible that Airbus could once again hit previous highs of €40 if current earnings growth continues.

In terms of potential stock risks, the travel industry as a whole is still operating in an uncertain environment. If risk factors such as new variants of COVID or a weaker-than-expected rebound in demand affect potential customers’ appetite for orders, then Airbus could struggle to bounce back to prior levels.

Additionally, with Boeing proving more popular overall in supplying wide-body aircraft (typically used for long-haul flights) – a continued recovery in the travel industry could also mean long-haul travel is bouncing back again at pre-COVID levels as the risk appetite of potential travelers increases. If we saw this scenario play out over the next decade, Boeing could grab a bigger chunk of this market than Airbus.

Conclusion

In conclusion, I believe that despite a few difficult years, Airbus could experience significant growth in the coming years as air travel continues to recover and large airliners seek to upgrade existing fleets. Additionally, with the company’s P/E ratio trading near a 10-year low, this could present a buying opportunity for investors with a higher appetite for risk.