MTUAF - MTU Aero Engines Stock: An Attractive Growth Buy

2023-03-13 13:15:55 ET

Summary

• MTU Aero Engines showed strong 2022 results despite supply chain pressures.
• The company is attractively diversified between OEM and MRO activities as well as commercial and defense exposure.
• MTU Aero Engines increased its dividends and that should be one of many hikes to come.

While most of my coverage focuses on the primary contractors in aerospace and defense, there is a lot of value in the supply chain as well. That seems to be holding particularly true for companies that are in some way affiliated with the production of turbofans. Park Aerospace ( PKE ) is an example of that. Another company that I find quite charming for investment is MTU Aero Engines ( MTUAF ).

MTU Aero Engines Has An Attractive Business Case

What I usually am looking for in a company is some sort of diversification. For instance, a distribution between commercial airplanes exposure and exposure to the relatively stable defense industry. That gives you exposure to the growth prospects of air travel demand, but also provides some protective layering via the defense exposure. Furthermore, a healthy mix between original equipment and services to support that equipment is desired. During the pandemic, we saw aircraft production and deliveries dwindle with major challenges bringing production back to previous levels, but the services businesses boomed as increased flight activity spurred services demand.

MTU Aero Engines checks all those boxes. The company has exposure to a wide a wide range of commercial aircraft engines in the single aisle and wide body segment including the Pratt & Whitney GTF family, the CFM LEAP, GEnx and CF6. The company has a nice commercial aircraft engines mix of seasoned in-service products as well as next generation turbofans that are still gaining market share. In the military aircraft engines segment, the company has exposure via the engines for the Eurofighter Typhoon, the A400 as well as ramping up programs such as the Sikorsky CH-53K and the Next Generation Fighter engine.

MTU Aero Engines: Visualizing The Growth Story

The slide above actually shows all that you want to know about MTU Aero Engines in 2022. Revenues increased strongly by 27% and we saw adjusted income on EBIT and net level grow in excess of that at a rate of approximately 40% with free cash flow growing 36%. Revenues came in somewhat lighter than guided with €5.3 billion while €5.4 billion to €5.5 billion was guided for. Adjusted margins was guided to be up 30%, 40% was achieved and the cash conversion rate came in 69% at the high end of the 60%-70% guided for.

In the OEM segment, commercial revenues rose by 18% with defense showing the relative stability with 3% growth and 25% growth for the commercial business driven by the PW1000G turbofan and strong parts demand for all main platforms. For the military business, supply chain issues resulted in growth below expectations but there still was growth. Adjusted EBIT grew in excess of revenue growth at a rate of 21% with margin expansion of 0.4 percentage points layering on top of the revenue growth.

In the MRO business, revenues were up 17% on a dollar basis which was below the 20% targeted. Nevertheless, helped by strong mix as and FX-tailwinds adjusted EBIT grew 80% on 32% higher revenues.

Overall, what we see is that despite not meeting expectations in all areas. The growth has been strong and the profits have exceeded expectations. MTU Aero Engines has a solid position as an OEM on key turbofan programs that are set to scale further in the years to come and exposure to established program. It leverages that position to bolster its MRO business. That gives an additional stream of revenues, but besides that also provides some layering as aircraft deliveries sliding to the right also result in increased servicing requests for in-fleet engine.

Does MTU Aero Engines Stock Pay A Dividend?

MTU Aero Engines paid a dividend of €2.10 per share and for 2022 it proposed a €3.20 dividend per share. What we see is that there is a growth story incorporated in the dividend payments. The 2019 dividend was an exception as the €3.40 proposed dividend was not paid and brought back to the statutory minimum of 4 cents per share, but since then we saw a strong recovery in the dividend payments and I expect further growth. With a forward yield of 1.4%, MTU Aero Engines looks expensive from yield perspective. However, had you bought in 2005 and continued holding, your yield on cost would now be 12.5%. With the dividend growth story on display I think the yield on costs and future hikes should be taken into consideration.

MTU Aero Engines Guides For Strong 2023

For 2023, we see that revenue growth in all segments is guided for with strong stable margins and a significant increase in revenues, which I believe positions the company for another strong year and another year of dividend increases.

Conclusion: MTU Aero Engines Stock A Strong Growth Buy

Looking at MTU Aero Engines, I like the way the company is structured and their industry and platform exposures allowing the company to capitalize on growing demand for airplanes and service the in-fleet engines. Providing a strong business with growth prospects that translate into the dividend distributions. As a result, I am rating MTU Aero Engines stock a strong buy.

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