The Boeing Company (BA) in Chicago and Airbus SE (EADSY) are two prominent players in the aerospace and defense industry. BA designs, manufactures, and sells commercial jetliners, military aircraft, satellites, missile defense systems, human space flight, and launch systems and services worldwide. It operates through four segments— Commercial Airplanes (BCA); Defense, Space & Security (BDS); Global Services (BGS); and Boeing Capital (BCC). In comparison, based in the Netherlands, EADSY designs, manufactures, and delivers aerospace products, services, and solutions worldwide. It operates through three segments–Airbus; Airbus Helicopters; and Airbus Defense and Space.
Increasing U.S. military aid for Ukraine bodes well for the aerospace and defense industry. Furthermore, fears of attacks from Russia are causing several countries to reassess their defense budgets, which should result in several new contracts for aerospace and defense companies. Unfortunately, losing orders from Russia, a prime customer in the aerospace and defense industry, has led some defense companies to suffer a slight decline in sales during the first quarter. However, efforts to increase domestic security have helped defense stocks escape the market sell-off lately.
Investor optimism in this space is evident in the Invesco Aerospace & Defense ETF’s (PPA) 6.3% gains over the past six months versus the SPDR S&P 500 Trust ETF’s (SPY) 8.8% loss. The global aerospace and defense market is expected to grow at a 2.5% CAGR to $49.68 billion by 2026. Therefore, both BA and EADSY should benefit.
While BA’s stock has declined 5.5% in price over the past month, EADSY surged 8%. EADSY is a clear winner with 3.4% gains over the past six months versus BA’s 30.6% loss. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On June 1, 2022, BA and several Canadian industry partners, including CAE, GE Aviation Canada, IMP Aerospace & Defence, KF Aerospace, Honeywell Aerospace Canada, and Raytheon Canada, announced their collaboration to offer BA’s P-8A Poseidon for the Canadian Multi-Mission Aircraft (CMMA) requirement. This should improve Canada’s capability to defend its northern and maritime borders while ensuring interoperability with NORAD and NATO allies. It can also operate on a 50% blend of sustainable aviation fuel and offer advanced anti-submarine warfare, anti-surface warfare, intelligence, surveillance, reconnaissance, and search and rescue capability. This should allow BA to nurture its long-standing relationship with the Royal Canadian Air Force.
On June 1, 2022, EADSY’s Airbus Helicopters segment in Japan and Japan-based airline operator Nakanihon Air (NNK) jointly conducted a 30-minute flight with NNK’s twin-engine, heavy-lift H215 helicopter, achieving the nation’s first sustainable aviation fuel (SAF) helicopter flight. It is fueled with 600 liters of SUSTEO 10, a renewable jet fuel that contains 10% SAF mixed with Jet A-1 and produced by Euglena, Japan’s first biofuel manufacturer. This SAF-powered flight is an important step for the companies’ shared vision of reducing CO2 emissions.
Recent Financial Results
BA’s revenues for its fiscal 2022 first quarter, ended March 31, 2022, decreased 8.1% year-over-year to $13.99 billion. The company’s non-GAAP operating loss came in at $1.17 billion, representing a 311.3% rise from its year-ago period. While its net loss increased 127% year-over-year to $675 million, its non-GAAP loss per share grew 20.6% to $2.75. As of March 31, 2022, the company had $7.41 billion in cash and equivalents.
For its fiscal 2022 first quarter, ended March 31, 2022, EADSY’s net sales grew 14.7% year-over-year to €12 billion ($12.88 billion). The company’s gross profit came in at €2.54 billion ($2.73 billion), representing a 71.7% rise from the prior-year period. Its pre-tax profit was €1.43 billion ($1.53 billion) for the quarter, indicating a 209.3% year-over-year improvement. EADSY’s net profit came in at €1.19 billion ($1.28 billion), up 244.8% from the year-ago period. Its EPS was €1.55, indicating a 237% year-over-year improvement. As of March 31, 2022, the company had €15.05 billion ($16.14 billion) in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, BA’s EBITDA has decreased at an 84.3% CAGR. BA’s revenue is expected to grow 19.8% year-over-year in its fiscal 2022, ending Dec. 31, 2022, and 22.7% in fiscal 2023.
Over the past three years, EADSY’s EBITDA has grown at an 8.4% CAGR. Analysts expect EADSY’s revenue to grow 8.2% year-over-year in its fiscal 2022, ending Dec. 31, 2022, and 17.4% in fiscal 2023.
Valuation
In terms of forward EV/Sales, BA is currently trading at 1.63x, which is 17.3% higher than EADSY’s 1.39x. And in terms of forward EV/EBITDA, EADSY’s 10.21x compares with BA’s 23.50x.
Profitability
BA’s trailing-12-month revenue is higher than EADSY’s. However, EADSY is more profitable, with a 9.4% net income margin versus BA’s negative value.
Furthermore, EADSY’s levered free cash flow, ROA, and ROTC of 4.1%, 3.1%, and 14%, respectively, compare with BA’s negative values.
POWR Ratings
While EADSY has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, BA has an overall D grade, which equates to Sell. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
EADSY has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. EADSY’s 1.39x forward EV/Sales is 12.4% lower than the 1.59x industry average. BA’s C grade for Value reflects its slightly higher-than-industry valuation ratios. BA’s 1.63x forward EV/Sales is 2.7% higher than the 1.59x industry average.
In terms of Quality, EADSY has been graded a B, which is consistent with its higher-than-industry profitability ratios. EADSY’s 13.9% trailing-12-month EBITDA margin is 4.1% higher than the 13.4% industry average. BA’s C grade for Quality reflects its lower-than-industry profit margins. BA’s 0.1% trailing-12-month EBITDA margin is 99.4% lower than the 13.4% industry average.
Of the 77 stocks in the C-rated Air/Defense Services industry, EADSY is ranked #4, while BA is ranked #63.
Beyond what we have stated above, our POWR Ratings system has graded BA and EADSY for Value, Quality, Stability, and Growth. Get all BA ratings here. Also, click here to see the additional POWR Ratings for EADSY.
The Winner
Amid growing threats from Russia, increasing defense budgets of several countries should benefit both BA and EADSY. However, its relatively lower valuation and higher profitability make EADSY a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Air/Defense Services industry.
BA shares were trading at $139.01 per share on Friday afternoon, down $1.49 (-1.06%). Year-to-date, BA has declined -30.95%, versus a -13.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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