Investors largely forgave Airbus (NASDAQOTH: EADSY) after the European planemaker and Boeing (NYSE: BA) archrival "missed earnings" three months ago. Investors' faith in Airbus's ability to rebound was rewarded last week when Airbus turned in a Q3 earnings report that "beat" on both sales and earnings.
In fact, no sooner had Airbus reported its earnings beat than its stock jumped 4.4%. But over the past week, those gains have eroded, leaving Airbus stock right back where it started before earnings.
So ... were investors right then when they gave Airbus its share price bump, or are they right now to take it away? Let's find out.
What Airbus said
Announcing its latest financial results last week, Airbus reported revenues of 43 billion euros for the first nine months of 2017 (about $50.8 billion when converted into dollars by S&P Global Market Intelligence), up just a fraction of 1% from revenues it had collected at the end of Q3 one year ago. Airbus earned $1.5 billion in operating profits on those sales (a 3% operating profit margin), and at the per share level earned $2.82, diluted.
With sales growing less than 1%, you can't exactly say that business has been brisk at Airbus this year -- but things should be looking up soon. Management noted in its report that it has taken $59.9 billion in new orders so far this year, which is more than enough to replace the revenues it has recorded, and in fact gives Airbus a book-to-bill ratio of 1.18 year-to-date.
The company's backlog now stands at more than $1.11 trillion in work waiting to be done. While it's true that Airbus has so far taken in fewer new orders in 2017 than it had by this point in 2016, and that Airbus' backlog has declined over the last nine months as a result, Airbus's mammoth backlog gives it plenty of room to maneuver here.
A legal sticky wicket
So why has the stock been sliding of late? Headline risk is one answer. In the course of reporting its numbers, Airbus reminded investors that it's under investigation by both the UK's Serious Fraud Office (SFO) and France's Parquet National Financier (PNF) regarding "potential issues across Airbus' business." Additionally, it seems Airbus has a new problem with the U.S. Department of State regarding its obligations under Part 130 of the US International Traffic in Arms Regulations (ITAR). While not all the details are clear, it seems both of these legal issues relate to Airbus paying commissions to middlemen to assist it in making foreign sales of aircraft.
And a profits problem, too
Another issue, and one that concerns me more, is the fact that for the third quarter in a row now, Airbus has posted negative operating cash flow for its business. Once capital spending is factored in, it appears Airbus has now racked up more than $5 billion in negative free cash flow so far this year -- a number that belies the company's claim to have earned $2.2 billion in net income year to date.
This might not be so bad if it weren't for the fact that -- in marked contrast to Boeing here in the U.S. -- Airbus has a history of generating weak-to-negative free cash flow even in years in which it reports positive net income under GAAP. S&P Global data confirm that Boeing has generated billions in positive free cash flow in every year since 2009, and grown its cash profits every year since 2010. At Airbus, on the other hand, free cash flow ran negative in 2013 ($1.5 billion burnt), was only barely positive ($14.5 million) in 2014, and turned negative again ($36 million) in 2015.
In 2016, Airbus looked like it might finally have turned the corner, reporting nearly $1.4 billion in positive free cash flow. And in its forward guidance, Airbus seemed to imply that 2017 will still turn out well, with cash profits "similar to 2016 before M&A and Customer Financing" by the end of this year. But the way things seem to be going, I cannot say that I have a lot of faith that Airbus will end this year in the black.
Unless something dramatic occurs between now and the end of December, Airbus looks destined to erase all the cash profits it earned last year, and end 2017 deeply in the red.
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