Profiting from Divergence: A L/S Trade Strategy on Airbus and Boeing
Airbus’ Strong Recovery and Boeing’s Challenges: An Ideal Pair Trade?
Hello Gold Subscribers!
We’re back to another Gold Pair Trade Suggestion for September 2024.
Airbus and Boeing are the two largest aircraft manufacturers in the world, dominating the global commercial aviation market. Both companies produce a wide range of aircraft, from single-aisle planes to wide-body jets, and are central figures in the aerospace industry.
Both companies serve similar markets and derive a significant portion of revenue from commercial airplanes, AirBus with over 70% while Boeing at 40% of revenues.
The divergence between Boeing and Airbus stocks that started in 2021 can be attributed to several factors. Boeing continued to face significant challenges, especially with its 737 MAX aircraft, which was plagued by safety concerns and grounding orders from regulators, including the FAA. These issues, along with supply chain disruptions, delayed deliveries, and hefty financial losses, further impacted its performance. Additionally, the company struggled to regain profitability, posting large operating losses in both its commercial and defense divisions.
In contrast, Airbus navigated these turbulent times more successfully. The company benefitted from a stronger recovery in air travel and its ability to ramp up production, with higher aircraft deliveries than Boeing. Airbus also maintained better profitability and financial stability, allowing its stock to rise significantly, while Boeing's continued troubles contributed to a drop in its stock value.
As we can see below BA 0.00%↑ profitability was hit significantly.. Overall leverage has been more or less stable due to continue issuance of stock.
On the other hand, Airbus numbers have been significantly more stable. However, there has been some slow down in profitability in the last 2 quarters and the company also issued stock even with a negative net debt position.
Although Boeing has been under pressure due to specific issues, such as the 737 MAX crisis and production delays, this doesn't mean Airbus is immune to similar risks. Airbus should not entirely discount some of the challenges Boeing faces. Just because these issues haven’t directly affected Airbus so far doesn't eliminate the possibility that it could encounter comparable setbacks in the future.
The recent leadership change at Boeing, with a new CEO taking charge in early August, adds an interesting dimension to a potential long/short strategy. As Boeing finalizes its new Long-Term Incentive Plan (LTIP), management may have less incentive to release positive news or offer strong forward guidance until the package is officially approved by the board. This creates an environment where near-term performance might not reflect the full potential of the company, presenting an opportunity to capitalize on market sentiment in a long/short setup.
Even though the annual meeting is still some time away, we believe the current divergence between Airbus and Boeing is significant enough to present a compelling long/short opportunity. While the trade may take time to fully play out, the extent of the disparity makes it a strategy worth considering for patient investors.
At the time of writing, Boeing's stock is trading at $156.46, while Airbus is trading at €129.80. The proposed long/short position consists of going long on 7.20 shares of Boeing (BA.US) and shorting 16.89 shares of Airbus.