AIRBUS & BOEINGA FINANCIAL ANALYSIS

Airline Industry

May 31, 2014

Taposh Dutta Roy

& Team

Boeing Overview• Founded 1916 in Washington State; HQ in Chicago

• Leader in commercial and defense aircraft; defense,

satellite and space systems

• Acquired several aerospace pioneers (e.g. McDonnell

Douglas, Rockwell International)

• Ambitious 787 Dreamliner – composite materials, fuel

efficient - $32B program cost

• 2013 – 648 aircraft delivered, $86.6 billion revenues

Boeing Corporate Governance• James McNerney:

• Elected to serve as CEO and chairman of the board July 1,

2005

• Salary for 2013 $1.9 million

• Awarded $3.7 million in stock option grants

• 20 analysts cover Boeing

• CEO is the only insider on the Board

• None of the individual Board members hold a

disproportionate amount of stock

• Most of the top owners are equity firms

Boeing Corporate Governance

“The Board’s compensation should be a mix of cash and equity-

based compensation with a significant portion of such

compensation in the form of the company’s stock or stock-

equivalent units. Non-employees directors receive a substantial

portion of their compensation in deferred stock units, which must

be held until retirement or other termination of Board service.”

-Boeing filing SEC

None of the individual board members or the companies for which

they work own a disproportionate share of stock. Many of the top

firms are equity firms.

Airbus Overview• HQ in Blagnac, France

• 1967 – consortium of European aerospace firms to

compete with US firms

• 1970 – Airbus Industrie formed: French, German,

Spanish, British government backed entities

• 2001 – consortium is merged as European Aeronautic

Defense and Space Company (EADS)

• 2013 – 626 aircraft delivered, € 59.3 billion revenues

• 2014 – Rebranded Airbus Group: Airbus, Airbus

Defense and Space and Airbus Helicopters

Airbus Governance• Prior to December 2012, the governments of Germany

France and Spain had effective veto power over

management decisions

• Dec 2012 – ownership overhaul – more “normal”

shareholder democracy – state entities own 28%

• Board makeup and insider holdings do not reflect

management balance of power

• 28 analysts covering; information broadly available

• CSR – adopting industry goals, not leading

• Ranked 73 of top 100 in Reputation Institute survey

• 72.6% held by institutional investors

• Four executives are in the top five direct holders

• Institutional ownership is down 12 million shares

Stockholder Analysis — Boeing

Stockholder Analysis — Airbus

• Merger with BAE

systems stopped by

company insiders

Sogepa & GZBV

(2012)

• Gov’t influence

relinquished allowing

Airbus to make major

business decisions.

Risk & Return: Boeing

Debt $43,427,702,772

Equity $103,136,011,176

Tax 27%

β(L) 1.28

β(U) 0.89

R(f) 2.73%

MRP 5.00%

R(e) 9.11%

R(d) 3.73%

WACC 7.22%

Used weekly data from 2009 through

2013 from Boeing and S&P 500 to

calculate regression:

y = 0.00036 + 1.28x

The weekly return averaged 0.32%

which results in estimating that Boeing

performed 0.12% better than expected.

R(f) (1 – β ) = -0.096%

Intercept – R(f) (1 – β ) = 0.1161%

Annualized return yields 5.97%

Risk & Return: Airbus

Debt $4,260,048,961

Equity $43,549,799,506

Tax 27%

Beta(L) 0.96

Beta(U) 0.89

R(f) 2.43%

MRP 5.60%

R(e) 7.44%

R(d) 3.43%

WACC 7.00%

Used weekly data from 2009 through

2013 from Airbus and CAC 40 to

calculate regression:

y = 0.0041 + 0.958x

The weekly return averaged 0.46%

which results in estimating that Airgus

performed 0.36% better than

expected.

R(f) (1 – β ) = 0.085%

Intercept – R(f) (1 – β ) = 0.36%

Annualized return yields 19.7%

Dividend Policy & Analysis — Boeing• Payout ratio consistent over 5 years

• 2009 was different – program problems = lower earnings

• Maintained dividend but paused stock repurchase for 3

years

Boeing 2013 2012 2011 2010 2009

CashDividends $1,642 $1,360 $1,263 $1,245 $1,233

DividendperShare $2.19 $1.81 $1.70 $1.68 $1.68Stockre-purchase $2.8B 0 0 0 $50M

PayoutRatio 0.36 0.35 0.32 0.37 0.89DividendYield 2% 3% 3% 2% 3%

Dividend Policy & Analysis — Airbus• Payout ratio growth over 5 years

• 2009 saw challenges with programs and orders

• Company posted a loss for the year

• Paused both dividends and stock repurchase

• Shareholder mix maybe have made this easier option

Airbus 2013 2012 2011 2010 2009

Dividend payout €587 €492 €366 €178 --

Dividend per share 0.75 0.6 0.45 0.22 0

Stock re-purchase €500M €31M €12M €40.5 M 0

Payout Ratio 0.41 0.40 0.35 0.32 0.00

Dividend Yield 1% 2% 2% 1% 0%

Dividend Policy & Analysis

• Last 5 years paid lower

dividend than max Possible

• Manage a stable dividend

growth

• Last 5 years paid higher

dividend than max possible

FCFE

• Manage a stable dividend

growth

Dividend Policy & Analysis

Boeing pays lower dividend as compared to the free cash flow

to equity. There is more room for Boeing to pay higher dividend

to its shareholders. Airbus has maintained a consistent dividend

policy and has paid more than their free cash flow. We would

recommend Boeing to pay more dividends and Airbus to

maintain their current dividend to shareholders

Measuring Investment Returns

• 2013 Equity Return Spread44.21ROE - 9.11Re = 35.10%

• Equity growth significantly

outpaced net income in

2012 and 2013 trending

ROE downward

• 2013 Capital Return Spread23.68ROC -7.22WACC = 16.46%

• Debt decreased from $12B

to $8B over previous 5 yrs.

• Creating surplus value over

past 5 years

Measuring Investment Returns

• 2013 Equity Return Spread13.64ROE – 7.44Re = 6.20%

• Net income growth trending

ROE upward

• 2013 Capital Return Spread8.20ROC -7.00WACC = 1.20%

• Positive Firm EVA in 2012 &

2103 after 3 prior years of

negative value

Capital Structure ChoicesBoeing Airbus

Long Term Debt - $8.07B

D/E Ratio – 30%

Long Term Debt - $3.51B

D/E Ratio – 11%

Capital Structure Choices

Benefits /Costs

Tax Benefits

Management

Discipline

Bankruptcy Costs

Agency Costs

Flexibility

Boeing

Low

Medium

Medium

Medium

Medium

Airbus

Low

Low

Medium

Medium

Low

Risk associated with A380

& 777 Production

Valuation• Stable growth model used

• Mature companies and markets

• Intense competition

• Significant growth expected in China & India

• Large back log of orders

• Valued using FCFF model

• Changing debt ratios

Valuation

• Higher valuation due to higher growth rate based on 5

year CAGR of revenue

• Airbus lower valuation:

• Higher costs (97% of sales vs. Boeing 93%)

• Twice the WC as Boeing, main cause is inventory

Firm Value

$(MM)

Value per

ShareMarket Value per Share

as of 12/13/2013

Boeing $202,744 $213 $136

Airbus $64,590 $77 $56