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We Think These Aircraft Engine-Makers Are Undervalued

We Think These Aircraft Engine-Makers Are Undervalued
Securities In This Article
GE Aerospace
Rolls-Royce Holdings PLC ADR
AAR Corp
Boeing Co

Chris Higgins: We recently took a deeper look at the wide-body commercial aircraft market. These are larger jets that seat over 230 passengers and are used on long-haul routes. These aircraft are manufactured by Boeing and Airbus. Wide-body engines are also a duopoly with GE and Rolls-Royce dominating the market.

We project about 8,600 wide-body deliveries over the next 20 years. Our forecast for smaller wide-body demand of roughly 6,400 aircraft is higher than other market forecasts due to our belief that the shift toward smaller wide bodies like the 787 and a smaller variance of the A350 will continue and be more pronounced than most industry analysts believe with negative implications for Boeing's 777X and for Airbus' A350-1000.

In addition to the overall market, we took a more detailed look on the next generation midsize aircraft that we think Boeing will launch in 2018 or 2019. Boeing will likely spend $16 billion on the aircraft, and we think that the limited market size means the business case will be challenging.

We have calls on the wide-body engine manufacturers, GE and Rolls-Royce. GE looks cheap to us, and thanks to narrow bodies, its aerospace unit remains its crown jewel. It's significantly undervalued. For Rolls-Royce, we think the market isn't pricing in lucrative, long-term aftermarket services on its Trent XWB engine; as a result, we think it's also a bit undervalued.

Finally, turning to the aircraft manufacturers, we don't see as much value. Boeing looks a bit overvalued after an impressive run, and Airbus is still slightly undervalued.

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About the Author

Chris Higgins

Senior Equity Analyst
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Chris Higgins, CFA, is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers aerospace and defense companies, airports, and airlines.

Before joining Morningstar in 2015, Higgins spent eight years working for Airbus Group in both the United States and Europe. While at Airbus Group, he held a variety of positions, ranging from corporate development to investor relations.

Higgins began career in strategy consulting, where he consulted leading U.S. and European aerospace and defense prime contractors. During his time in consulting, he led teams that solved business challenges ranging from merger and acquisition decisions to new product launches.

Higgins holds a bachelor’s degree in economics from Rhodes College, where he graduated as a member of Phi Beta Kappa, and a master’s degree in finance from The Henley Business School in the United Kingdom. He also holds the Chartered Financial Analyst® designation.

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