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Demand for planes keeps Airbus flying so why is the stock so cheap?

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Industries that are exposed to global mega trends can provide a sustained tailwind to the growth of the business. One example of this is Airbus SE (AIR:FP). Let’s look at some of these tailwinds which will ensure Airbus is flying for decades.

Airbus estimates that there are currently just over 20,000 aircraft in service around the world, and that this should expand to more than 42,000 by 2036. Over the same period another 13,000 planes will be required just to replace older models. This is a significant proportion of expected demand which is virtually certain to materialise.

Over Airbus’ 20 year forecast period the middle-class population is expected to almost double, driven primarily by emerging nations. In 2036 the ranks of the middle class should represent 56% of the total world population. As the emerging middle class increases, more people will find themselves with discretionary income which can be spent on flying, among other luxuries.

Consider that just three in 10 people from emerging countries took a flight in 2016, compared with 1.8 trips per American person per year. However, with the benefit of higher incomes, eight out of 10 people in emerging countries will be flying by 2036.

All of this growth in air passenger traffic will require an expansion in airline fleets. The only way to support growth in both the long run and the short run is to operate more planes.

Against this backdrop Airbus has a backlog of orders stretching a decade into the future compared to its current rate of production. That is, Airbus has orders for almost 7000 planes compared with 688 which it delivered to customers in late 2016.

Using Airbus’ forecast of almost 35,000 deliveries over the next 20 years implies 5%-plus average growth in the number of annual plane deliveries through 2036. Therefore, the demand for planes keeping Airbus flying for decades.

However, at the current share price of around €90 our analysis suggests that the market is expecting relatively lower growth in unit deliveries in the next two decades – and little to no upward pricing, even as new models are released.

This is a source of variant perception and leads us to believe that despite a 47% rally in the Airbus share price the past year, the stock is still cheap.

Written by Roger Montgomery

Roger Montgomery

Roger Montgomery is the chairman and CIO of Montgomery Investment Management.

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