We Think These Aircraft Engine-Makers Are Undervalued

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.