Airbus… Not Taking Off

Intermediate
  • Despite Airbus saying carriers are still paying, this is legacy payments pre COVID-19
  • Market sentiment is bearish as cash generation is deemed hard
  • The top line will fall by 30% when we look at Q4 2020 versus Q4 2019
  • The recent price level is just a staging post ahead of a new leg lower.

Airbus is an international pioneer in the aerospace industry, a leader in designing, manufacturing and delivering aerospace products, services and solutions.

The shares, which are marked by negative sentiment across the board fell by 2.04 or 3.19% on Friday so drastically underperforming the CAC 40 which was only down by 0.18%.

The mood of the market toward Airbus was soured by the view the group is going to find cash generation hard to achieve during what will undoubtedly be a long time before airlines and the broad travel industry recovers. Airlines are going to be reluctant to take all the new aircraft that Airbus would like to deliver. Figure 1 shows that cash generation in Q1 2020 was shocking.

Airbus Group SE Quarterly Cash Flow Data
Figure1: Airbus Group SE Quarterly Cash Flow Data. Source: www.investing.com, Spotlight Ideas

One must ask if the stock is good intrinsic value? An often-used tool is the Discounted Cash Flow (DCF) model.

Potential shareholders must also consider the cost of equity, perhaps turning to the discount rate, rather than the cost of capital or weighted average cost of capital, (WACC) which accounts for debt.

However, DCF is not designed to capture the cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance.

One must therefore consider the risk factors Airbus may face and the chief of these is that as cash flow generation is going to be a weak spot one has to express a concern about the ability of Airbus to meet all of its interest payments. That will lead to more share price volatility.

I expect that the revenue, book at €70.478 Billion in December 2019 will fall by 30.06% to a mere €49.29 million. This is one reason why in March ratings agency Standard & Poor’s placed Airbus on its watch list for a possible downgrade as doubts surfaced over the future level of aircraft deliveries and advance payments from airlines battered by the coronavirus crisis.

S&P said it was concerned delays could weaken the company’s A+ credit profile and industry sources said the pre-delivery payments currently flowing through were ones that had already received financing before the crisis began. The move came a day after Fitch cut the outlook on Airbus debt to negative, citing the risk to its A- rating of deferrals of aircraft deliveries.

Airbus group SE
Figure 2: Airbus Group SE Source: www.investing.com, Spotlight Ideas

I am not willing to buy Airbus at this stage, if anything, playing it from the short side, looking to exploit the level of negative sentiment that surrounds the stock, targeting supports at 55.23, 53.76 and 52.28.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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