MTUAF - MTU Aero Engines: What Is The Stock Worth After RTX Debacle?

2023-10-16 05:22:58 ET

Summary

• The commercial aerospace industry struggles to recover from the pandemic, facing challenges in rehiring and supply chain disruptions.
• MTU Aero Engines faces significant financial impact due to quality issues with PW1000G geared turbofan.
• Analyst estimates for MTU Aero Engines need to be revised further to accurately reflect the impact of these issues.

The commercial aerospace industry is trying to regain momentum after the pandemic crippled the airline industry by reducing demand for airplanes. As demand started to revive, the industry faced the big issue that it could not efficiently rehire people. On top of that, the war in Ukraine and sanctions against Russia took away titanium supply and expertise in forging as well as forging capacity. Unfortunately, for the industry, it did not stop there, and aerospace companies have been coping with quality issues. The problems with the PW1000G geared turbofan are an example of that with quality issues that are dating back years but are now affecting airlines as well as suppliers.

One of those companies is MTU Aero Engines ([[MTUAF]], [[MTUAY]]), which is a risk-sharing partner on the PW1000G program. I have a buy rating on the stock and a previous price target of $267 per share. The stock, however, has lost over a quarter of its value on the back of the issues on the PW1000G have become clearer. In this report, I will be implementing the most recent analyst estimates to assess whether the stock is still a buy.

The PW1000G Cost For MTU Aero Engines

MTU Aero Engines has announced that it would be suffering a $1.07 billion hit this year to sales and EBIT. Using the slide deck from RTX on the GTF issues, we can also perform a simple sanity check using the share of MTU Aero Engines in the program which is 15 to 18 percent which would indicate a $900 million to $1.26 billion impact with the midpoint being at $1.08 billion.

The company has affirmed its guidance for €6.1 billion to €6.3 billion in sales this year, but that figure may be revised. Adjusted EBIT is forecast at more than €800 million, which is in line with the previous guidance, but it should be noted that the adjusted figure will likely exclude the PW1000G cost impact. So, on an EBITDA basis, an impact is expected, while the associated liquidity pressure will be present in the subsequent years.

Analyst Estimates Have Come Down For MTU Aero Engines

What is interesting to note is that the analyst estimates for EBITDA as tabulated above have come down only slightly and do not reflect the $1.07 billion charge for the current financial year. Since part of the impact is expected in 2026, it is difficult to say whether analysts are fully and accurately incorporating the impact but it does seem that analyst estimates have to come down further which I would expect to happen after the company announces earnings.

On the free cash flow level, we see that the estimates have come down significantly more, but the $1.07 billion pressure should mostly be on a cash basis and we see that while the EBITDA has come down only around 16% of the full cost estimate, the cash flow has come down 19% in comparison to previous estimates but only covers around a third of the expected impact. So, if we want to assess the impact for MTU Aero Engines the analyst estimates at this point are not quite reliable.

The Buy Thesis For MTU Aero Engines Still Seems Valid

I previously had a $267 per share price target which at the time of publication of said rating implied 15% upside. After incorporating the revised numbers that provide steeper reductions to EBITDA and free cash flow than currently modeled amongst analysts, we get to a price target of $256 per share. So, the price target has come down, but the upside has gone up since MTU Aero Engines stock has tanked significantly.

So, despite liquidity pressures in the years ahead, there still remains 48% upside and indeed the lower earnings expected for 2023 will make the stock significantly overvalued but while the recognition of the charge will happen in 2023, the impacts will be largely felt in 2024 and onward and with this year ending in 2.5 months from now it already makes sense to start looking at 2024 even if 2023 wouldn’t be disfigured. So, I don’t view the 2023 EBITDA pressure as a reason not to buy and even think that the current lower stock prices offer a very compelling opportunity to position for the long term.

Conclusion: MTU Aero Engines Stock Is An Even Stronger Buy Today

While some caution is needed for companies with exposure to the plagued PW1000 turbofan, I do believe that the current stock price does offer a compelling entry point even for the coming years in which there will be liquidity pressure for MTU Aero Engines.

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