VALUATION OF AIRBUS
Introduction
Valuation of a company provides crucial details of the operation of a company. In this context, the following task will be based on the valuation and analysis of the operation of Airbus. In this regard, calculation such as DCF and other book value based calculation will be provided. This will help in analysis of the operation of the company in a better manner. Apart from that, the operation of the company will be compared with that of Boeing.
Brief overview of company
Airbus is a European based multinational aerospace company and has set its headquarters in France. As of 2019, the Airbus’s operation was crowned the world’s largest airline company and took most of the airline-based orders in its operation. Originally, the company was registered under the operation of the Netherlands. However, the shares of the company are publicly traded in France and has the main office in France. The company has a huge presence in Germany and Italy as well in regards to the services that the company provides. The company has diversified its operation due to which it is able to accrue more revenue about its competitors in the market. The company produces both civil as well as defence based aircrafts. This operation makes the company highly profitable in its area of operation. The revenue generation is high in the defence based aircraft sector as the materials used need to be of super high grade.
That is made in order to withstand the conflict in a better manner (Airbus.com, 2020). The company is mainly divided into three main sectors in regards to its operation on the market. The first is the commercial airlines, which is the forefront of the company. This is followed by the military, defence based aircraft, and sometimes spaces related aerospace operation as well. Lastly, the company operates in the helicopter sector, which is also for the commercial purpose in the market of operation. The company is considered the third largest manufacturer of the helicopters in terms of the deliveries that are made. As of 2018 operation of the company, Airbus generated a total revenue of €70.5 billion. This is the most profitable company in Europe. The operating income of the company stood at €5.04 billion as of 2018 (Airbus.com, 2020).
Discounted cash flow analysis
The discounted cash flow is used in order to interpret the estimation of the value that can be derived for the investment that has been made. This is done in accordance with the future cash flows that can be derived from the operation of the company. This assists in analysing the value of the company today based on the projection of the cash flows that the company will accrue in future (Beaugency, Mustafa ErdemSakinç and Talbot, 2015).
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||
| Revenue | 64450 | 66581 | 59022 | 63707 | 70077.7 | 77085.47 | 84794.017 | 93273.4187 | |
| Cost of sales | 55599 | 61317 | 52149 | 54920 | 60412 | 66453.2 | 73098.52 | 80408.372 | |
| Gross margin | 8851 | 5264 | 6873 | 8787 | 9665.7 | 10632.27 | 11695.497 | 12865.0467 | |
| Selling expenses | -1065 | -997 | -872 | -861 | -947.1 | -1041.81 | -1145.991 | -1260.5901 | |
| Administrative expenses | -1586 | -1726 | -1567 | -1574 | -1731.4 | -1904.54 | -2094.994 | -2304.4934 | |
| Research and development expenses | -3460 | -2970 | -2807 | -3217 | -3538.7 | -3892.57 | -4281.827 | -4710.0097 | |
| Other income | 474 | 2689 | 981 | 1656 | 1821.6 | 2003.76 | 2204.136 | 2424.5496 | |
| Other expenses | -222 | -254 | -336 | -182 | -200.2 | -220.22 | -242.242 | -266.4662 | |
| Share of profit from investments | 1016 | 231 | 331 | 330 | 363 | 399.3 | 439.23 | 483.153 | |
| Other income from investments | 54 | 21 | 82 | 109 | 119.9 | 131.89 | 145.079 | 159.5869 | |
| EBIT | 4062 | 2258 | 2685 | 5048 | 5552.8 | 6108.08 | 6718.888 | 7390.7768 | |
| Tax rate | 677.00 | 291.00 | 1462.00 | 1274.00 | 1401.40 | 1541.54 | 1695.69 | 1865.26 | |
| Non cash expenses (Depreciation) | 2466 | 2294 | 2298 | 2444 | 2688.4 | 2957.24 | 3252.964 | 3578.2604 | |
| Change in working capital | 1618 | 1660 | 1631.95 | 1500.57 | 1650.627 | 1815.6897 | 1997.25867 | 2196.984537 | |
| Plant property and equipment | 16622 | 17127 | 16913 | 16610 | 16773 | 18450.3 | 20295.33 | 22324.863 | 24557.3493 |
| Capital expenditure | 2971 | 2080 | 1995 | 2607 | 4365.7 | 4802.27 | 5282.497 | 5810.7467 | |
| Free cash flow | 1262.00 | 521.00 | -105.95 | 2110.43 | 823.47 | 905.82 | 996.40 | 1096.04 | |
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||
| WACC | 7.79% | ||||||||
| Years for valuation | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | |
| Discount factor | 1.077895 | 1.161857 | 1.25236 | 1.349912502 | 1.455063761 | 1.568405763 | 1.690576525 | 1.822263764 | |
| Discounted free cash flow | 1170.801 | 448.4199 | -84.6003 | 1563.382809 | 565.9360244 | 577.5420631 | 589.3861148 | 601.4730605 |
Table 1: Discounted Cash Flow calculation
Working notes
| WACC Calculation | ||
| Capital Structure | ||
| Weight of Debt | 9.38% | |
| Weight of equity | 90.62% | |
| Debt / Equity | 10.35439431888030% | |
| Cost of Equity | 8.81% | |
| Cost of Debt | ||
| Cost of Debt | 7.67% | |
| Tax Rate | 127.13% | |
| After Tax Cost of Debt | -2.08% | |
| WACC | 7.79% | |
Table 2: Weighted Average Cost of Capital calculation
| WEIGHT OF EQUITY | |||
| Formula | Equity | Debt | Results |
| Equity/ (Equity + Debt) | 103483.967 | 10715.138 | 91% |
Table 3: Weight of Equity
| WEIGHT OF DEBT | |||
| Formula | Equity | Debt | Results |
| Debt/ (Equity + Debt) | 103483.967 | 10715.138 | 9% |
Table 4: Weight of Debt
| COST OF EQUITY (Ke) | |
| Particulars | Results |
| Beta | 1.47 |
| Risk-free rate | -0.14% |
| Market premium | 6% |
| Cost of equity | 9% |
Table 5: Cost of Equity (Ke)
| COST OF DEBT (Kd) | |
| Particulars | Results |
| Interest expenses | 822.222 |
| Book value of company’s debt | 10715.138 |
| Cost of debt | 8% |
Table 6: Cost of Debt (Kd)
Analysis
In order to make the calculation, first the analysis of WACC was done. This assisted in discounting the free cash flows of the business operation. In order to calculate the WACC, the cost of equity and debt was undertaken which helped in determination of the WACC percentage (Binder, 2018). Next step was to analyse the free cash flow of the business operation of Airbus. In order to analyse that the following formula was used:
Free cash flow= EBIT- tax + Non-cash expenses (Depreciation) – Capital expenditure – Change in working capital
In this regard, it has been assumed that post 2018; all the factors will grow at a rate of 10%. This led to the estimation of the DCF for four additional years. After that the discount factor was analysed using the WACC by the formula of (one+WACC) ^one, (1+WACC) ^2 and so on based on the number of years. After that, the free flow of the cash was divided by the discount factor, which led to the determination of the discounted cash flow for the operation (Bouoiyour and Selmi, 2018).
Book Value Approach
Book value approach is one of the most common valuation techniques, which is used in order to understand operational stability. This valuation essentially analyses the value that can be acquired in case the assets of the business were sold. In addition to that, the liabilities are deducted and hence it provides a view of the company’s valuation in accordance with the book value recorded. The formula used in this regard is very basic as it is essential the depiction of total business liabilities form the total business assets (Götz, 2019).
In the case of Airbus, the company has total assets worth €115,198 million and current liabilities of €105,479 million. Hence the book value of the company is (115,198-105,479= €9,719). The asset section contains all forms of assets that are held by the operation of Airbus. Current and Noncurrent assets along with intangible assets of the firm such as goodwill. This provides a better view of the operation of the organization. Apart from that, the liabilities of the company also includes all the current as well as non-current liabilities in the operation of Airbus. The amount that has been determined marks the amount that will be acquired in case of liquidation of the company.
Replacement Cost Approach
Replacement cost essentially means that cost that the company needs to insure in order to change the existing fixed assets in the operation of the company (Popkovaet al. 2015). Based on that the calculation have been made below:
| Particulars | Amount (in € million) |
| Assets | |
| Non-current assets | 56564 |
| Current assets | 58300 |
| Total assets | 114864 |
| Liabilities | |
| Non-current liabilities | 44693 |
| Current liabilities | 60354 |
| Total liabilities | 105047 |
| Original book value | 9817 |
Table 7: Original book value and balance sheet
| REPLACEMENT COST ADJUSTED | ||
| Particulars | Note | Amount (in € million) |
| Assets | ||
| Non-current assets | 1 | 63351.68 |
| Current assets | 58300 | |
| Total assets | 121651.68 | |
| Liabilities | ||
| Non-current liabilities | 44693 | |
| Current liabilities | 60354 | |
| Total liabilities | 105047 | |
| Replacement cost | 16604.68 |
Table 8: Replacement cost with adjusted balance sheet
Working note 1: Revaluation of Non-current asset
| NOTE 1 | |
| Non-current assets | 56564 |
| (Less) Unused portion @20% | 11312.8 |
| Balance of Non-current assets | 45251.2 |
| Revaluation @125% | 63351.68 |
Table 9: Working note 1
Analysis
From the calculation, it has been noticed that in this case the replacement cost of Airbus would amount to nearly €16,604 million. This is a huge expense that the business operation will have to incur in order to make the operation better (Raina and Gries, 2019). It is to be noted in this case that there are two assumptions under the calculation:
- It has been assumed that almost 20% of the non-current assets are unused in the business operation
- Value of the Non-current assets will be appraised by almost 40%
Market Approach
Market wise analysis of the Airbus, the company is quite stable in its market of operation in the company. The company makes low risk partnerships with companies it thinks is stable. This makes the overall operation of the company better. Apart from that, the company holds the largest fleet of airlines in the world, which makes the operation of the company further stabilized in this regard (Airbus.com, 2020). The sales of the company are on rise along with the price earnings ratio. Apart from that, the Earnings per share is on rise as well in the company. This makes the operation highly stable. The net income of the firm is also on rise, which makes the operation of the company better over time. Apart from that, the Aerospace industry of Europe reports a standard price earnings ratio of 18.15X. The price earningsratio of Airbus is a staggering 26.37X. This provides that the company is highly profitable in regards to its operation.
Apart from that, the international peers generate PE ratio of 19.74X on an average. This proves that the operation of Airbus is highly profitable in regards to its operation (Airbus.com, 2020). Asset value of Airbus as of 2018 was €115,198,000,000, which makes the company highly stable. Apart from that, the market capitalization amounted to €72,390,000,000, which makes the company highly competitive in respect to the stock market. This indicates that the operation of Airbus is leading in its area of operation. The industry of Europe is highly captured by the presence of Airbus.
Comparison with Boeing
| Particulars | Airbus (in € billion) | Boeing (in € billion) | ||||
| 2016 | 2017 | 2018 | 2016 | 2017 | 2018 | |
| Revenue | 66.58 | 59.02 | 63.71 | 93.5 | 94.05 | 101.13 |
| Pretax profit | 1.29 | 3.83 | 4.29 | 5.57 | 10.05 | 11.6 |
| Dividend (€ per share) | 1.35 | 1.5 | 1.65 | 4.69 | 5.97 | 7.19 |
| EPS (€ per share) | 1.29 | 3.05 | 3.94 | 7.92 | 14.03 | 18.05 |
| Operating cash flow | 3.18 | 3.74 | 3.51 | 10.5 | 13.35 | 15.32 |
| Price earnings ratio | 48.71 | 22.43 | 21.42 | 19.31 | 20.74 | 20.51 |
| EBITDA | 2.064 | 5.266 | 6.589 | 8.475 | 12.461 | 14.17 |
| EV/EBITDA | 11.28 | 9.23 | 8.59 | 12.04 | 14.02 | 13.28 |
| Price/Book | 7.225 | 5.928 | 7.485 | 103.95 | 99.26 | 444.24 |
Table 10: Financial statistics of Airbus and Boeing
Analysis
Both Airbus and Boeing are highly profitable companies and hold the Duopoly in the global aerospace industry. It is evident that there exists a high competitive rivalry between the two aerospace giants. From the analysis provided in table 10, it is evident that the oppression of Boeing is better in comparison to that of Airbus. The operation of Airbus has less revenue generation in relation to that of the Boeing. Apart from that, the share prices are also higher in case of Boeing. It is the case with the dividend that is being provided to the shareholders of the company. The company falls behind Boeing in case of the price earnings ratio, which makes the operation of Boeing more favourable for investors in relation to that of Airbus.
Below is a detailed comparison of both the companies:
| Factors | Airbus | Boeing |
| Geographic diversification | The operation of Airbus is more diversified in comparison to that of Boeing. Moreover, the operation of Airbus are located in geographical locations with higher growth rates, which make the company profitable [refer to figure 1] | Boeing on the other hand is mainly reliant on generation of revenue from two major markets (Strelcová and Janasová, 2018). The diversification reduces the risk for Airbus better than that of Boeing[refer to figure 1] |
| Financial performance | It has been noted in this regard that the operation of Boeing is better than that of the Airbus. The operation of Airbus has been trying to increase its revenue. Airbus had the largest revenue growth in the last five years prior 2017[refer to figure 2] | However, in the case of Boeing, the revenue has grown significantly from 2014 and has increased almost three times faster [refer to figure 2]
|
| Diversification of revenue | Airbus is more reliant on its civilians and commercial aircrafts for its revenue. Almost 80% of the total revenue of Airbus comes from the civil aircrafts used for commercial purposes[refer to figure 3] | On the other hand, Boeing has made better diversification in terms of revenue that has been generated in the firm. The firm makes 60% revenue from civilian aircraft while the remaining 40% comes from military aviation[refer to figure 3]. |
| Reliability | That is not the case with that of the Airbusas there has been no major incidents of landing or crash in any of the Airbus fleet of aircrafts. There has been minor cases of landing but those were not serious or due to any technical error but only due to bad weather. This makes the operation of Airbus highly reliable in regard to their operation in the aerospace industry | In case of reliability, the Boeing is way below that of the Airbus’s operation. That is because there were two major groundings due to technical issues for Boeing, which made the reliability lower.Apart from that, there were two major fatal crashes for Boeing as well which makes the operations unreliable (Vasilenko, 2016). |
| Innovation | Airbus promotes innovation better than Boeing. That is because the operation of Airbus invests more in the research and development. That makes their airlines very safe in regards to the operation. | Boeing made one major research and development in 2016 after which there was no major research and development[refer to figure 4]. |
| Military based aviation | In this regard, Airbus produces moderate level of company fighters and helicopters for military based aviation. The Service is not the best in case of military based aviation | In this regard, the operation of Boeing is better than Airbus since the operation of Boeing is more advanced in terms of military based aviation sector. The materials used area of better quality along with highly tactile technology in order to make the aircrafts better for military usage.
|
Table 11: Detailed comparison of Airbus and Boeing
Charts for comparison
Geographic diversification
Figure 1: Diversification statistics
(Source: Nysenasdaqlive.com, 2020)
Financial performance
Figure 2: Financial statistics
(Source: Nysenasdaqlive.com, 2020)
Diversification of revenue
Figure 3: Revenue diversification
(Source: Nysenasdaqlive.com, 2020)
Innovation
Figure 4: Spending on research and development
(Source: Nysenasdaqlive.com, 2020)
Conclusion
From this analysis, it can be concluded that the operation of Airbus is very stable in regards to its operation. The company has made huge profits in regards to its operation in the market. Apart from that, the company holds records for the largest fleet of airlines in the world. The company needs to make improvements about its profitability since it falls behind its major competition in this regard to the operation of the company.
Reference list
Journals
Beaugency, A., Mustafa ErdemSakinç and Talbot, D., 2015. Outsourcing of strategic resources and capabilities: opposing choices in the commercial aircraft manufacturing. Journal of Knowledge Management, 19(5), pp. 912-931.
Binder, B.C.K., 2018. Does a high women quota in supervisory boards influence firm success? EuroMed Journal of Business, 13(3), pp. 291-314.
Bouoiyour, J. and Selmi, R., 2018. Are UK industries resilient in dealing with uncertainty? The case of Brexit. The European Journal of Comparative Economics, 15(2), pp. 277-292.
Götz, M., 2019. Unpacking the provision of the industrial commons in Industry 4.0 cluster 1. Economics and Business Review, 5(4), pp. 23-48.
Popkova, E., Morozova, I., Litvinova, T., Khisamova, A., Moskovtsev, V., Ioda, J. and Moiseeva, I., 2015. Provision of Economic Security by Creating Innovation Network of Transnational Cluster Initiatives. European Research Studies, 18(3), pp. 197-210.
Raina, A.A. and Gries, T., 2019. Development of a Mathematical Model for Supply Chain Mapping of Composite Materials in the Aerospace Industry. IUP Journal of Supply Chain Management, 16(2), pp. 43-67.
Strelcová, S. and Janasová, D., 2018. Clustering small and medium enterprises in the transport industry. Scientific Papers of the University of Pardubice.SeriesD.Faculty of Economics and Administration, (42),.
Vasilenko, N.V., 2016. Institutional features of collaboration in organizational structures of innovation economy. St.Petersburg State Polytechnical University Journal.Economics, (4),.
Website
Airbus.com2020, Financial Results & Annual Reports, viewed on 26/2/20 <https://www.airbus.com/investors/financial-results-and-annual-reports.html>
Airbus.com2020, About us, viewed on 26/2/20 <https://www.airbus.com/company/we-are-airbus.html>
Nysenasdaqlive.com 2020, Global Aerospace Hose Market 2020 Industry Future Growth – ITT Inc., Leggett & Platt, Inc., Eaton Corporation, Ametek, Inc., Airbus, Boeing, viewed on 26/2/20 <https://nysenasdaqlive.com/global-aerospace-hose-market-2020-industry-future-growth-itt-inc-leggett-platt-inc-eaton-corporation-ametek-inc-airbus-boeing/>