Stock of Airbus (ETR: AIR) (FRA: AIR) was absolutely clobbered last month, dropping nearly 20%. The stock was down more than 25% in 2014. But isn’t the market overreacting? After all, Airbus is a huge company – the second largest plane manufacturer in the world. It’s surely not going anywhere. Could this be a buying opportunity?
I don’t think so. In fact, given the state of the company, I’d even consider selling my shares, even if it meant taking a loss. Here are three reasons why:
1) The A380 isn’t taking off
Airbus initially had (pardon the pun) high hopes for the double-decker “superjumbo” A380. Hopes so high it spent $30 billion on the plane’s development (about twice the development cost of its slightly smaller A350). The optimism continued through the plane’s launch in 2007, when Airbus anticipated that it would sell 1,200 A380s (for nearly $500 billion in revenue). Fast forward to today, and only 318 A380s have actually sold…possibly for as much as a 50% discount, according to the New York Times: a dismal underperformance by any measure. In fact, the company didn’t manage to find a buyer for a single A380 in all of 2014.
It’s not hard to see why: the plane may simply be too big. And while passengers like a roomy interior, big planes tend to be far less fuel-efficient than their smaller brethren, and the A380 is no exception. Also, many airports are not equipped to handle such a large aircraft. Finally, the airlines that have purchased A380s have struggled to fill seats aboard such a large aircraft.
Airbus CFO Harald Wilhelm suggested last month that production of the airliner might have to be prematurely shut down, perhaps as soon as 2018, but then CEO Fabrice Bregier told Aviation Week that the company planned to launch two new models of the plane, a more fuel-efficient A380neo and a larger A380 stretch.
It’s hard to see, though, how either new model will solve the aforementioned problems. With airlines struggling to fill the already-huge plane, why would anyone want to invest in an even-larger “stretch” version? And with fuel prices remaining low for the foreseeable future, efficiency may not be as big a concern moving forward, although it’s impossible to know what will happen to oil prices in the long term.
Meanwhile, despite widely-reported battery fires, rival Boeing’s (FRA: BCO) (NYSE: BA) more fuel-efficient and slightly smaller 787 Dreamliner superjumbo jet is selling well, with 1,071 total orders as of December 2014, and nearly 100 planes delivered that year.
2) The A330 is coming in for a premature landing
In December, Airbus announced further production cuts for its smaller A330 line, down to nine planes a month, atop already-announced cuts earlier in 2014. That’s just enough production to fill existing A330 orders. In other words, Airbus isn’t predicting on getting any new orders for this model.
This isn’t surprising, though, as a more fuel-efficient version of the A330, the A330neo, is scheduled to enter service in 2017, and most airlines have been placing orders for the upgraded model. However, three years is a long time to wait for those orders to come to fruition, and if there are any mechanical or design problems with the A330neo, or delays in production, it would be disastrous for the company.
3) The dividend may start flying economy class
For some companies, it can be worth holding on to an underperforming stock just to reap the dividends while you wait for the price to recover. And in December, Wilhelm told investors that “we are paying a dividend next year, subject to board approval.“
Sounds good, but he also admitted, “It is difficult to give a precise number for 2015, but due to the A330 situation there is the likelihood for the cash flow to be negative.” This suggests to me that the dividend is likely to be lower than the current 0.75 Euro/share.
With an uncertain dividend for the next couple of years, I think investors would be better off putting their money elsewhere, as there are plenty of manufacturing companies whose prospects look better than Airbus’s and whose dividend yields are higher. These include DAX heavyweights like Volkswagen (ETR: VOW) (FRA: VOW) or BMW (ETR: BMW) (FRA: BMW) with dividend yields of 2.18% and 2.87%, respectively. Or, if airplanes are your thing, you could consider Lufthansa (ETR: LHA) (FRA: LHA), whose stock dropped throughout December, but which is likely to benefit this year from lower fuel prices and sports an attractive current dividend yield of 3.32%.
Bis zu 130 Mrd. US-Dollar investiert Investorenlegende Warren Buffett in nur ein einziges Unternehmen. Das zeugt von riesigem Vertrauen in das Zukunftspotential.
Buffett hat so einige Mega-Milliardeninvestments in seinem Portfolio. Wir haben sie näher analysiert, und angesehen, inwieweit sie sich zum Nachahmen eignen.
John Bromels has no positions in any of the stocks mentioned. The Motley Fool recommends BMW.