Airbus shares moved higher on Thursday after Citi upgraded the European aerospace manufacturer from Neutral to Buy and raised its target price to €217 from €208. The move reflects what the bank describes as durable long-term prospects for aircraft production, a strengthening defense unit and helpful currency trends.
By 11:37 GMT on Thursday, the stock had climbed 2.1%.
Citi analyst Charles Armitage said that although the recent ramp-up in deliveries has been delayed, the companys long-term production path remains intact. The firm continues to expect Airbus to reach a narrow-body production rate of 75 aircraft per month, a target the analyst said is underpinned by a robust order backlog.
The upgrade also factors in an improving outlook for Airbuss defense activities. Armitage highlighted rising production for the Eurofighter Typhoon and increased demand for military helicopters, trends he links to European rearmament efforts.
Currency moves are another element behind Citis more positive stance. A stronger U.S. dollar against the euro is anticipated to act as a tailwind, with Citi estimating that the currency shift could add roughly 48 to 10 per share to Airbuss valuation.
On near-term delivery dynamics, Armitage acknowledged weakness. January deliveries were described as particularly soft and February was expected to remain subdued. However, he noted signs that production indicators are improving, pointing to first flights as a more reliable gauge of production activity. "First flights (a better indicator of production) are improving and we would expect deliveries to follow," the analyst wrote.
Reflecting the slower delivery ramp-up, Citi trimmed its near-term operating profit forecasts by roughly 10-11%. At the same time, the bank lifted longer-term forecasts on the view that production will catch up and favorable foreign exchange trends will persist.
Armitage also addressed concerns about geopolitical tensions and their potential impact on air travel demand. He suggested such worries may be overstated and noted that higher oil prices can bolster the economic case for airlines to replace older jets. According to his analysis, modern aircraft typically save 15-20% in fuel, and with fuel comprising about 30% of airlines operating costs, the fuel efficiency of new planes becomes more attractive when fuel prices rise.
Context and implications
Citis reassessment combines production, defense and currency factors to justify a more bullish stance on Airbus despite short-term delivery setbacks. The upgrade and target-price increase reflect an expectation that near-term softness will give way to stronger production and earnings over time.
Investors should weigh the near-term adjustments to operating profit against the longer-term upside that Citi has outlined.