Airbus and 3 More Aerospace Stock Picks From Goldman Sachs

Goldman Sachs launched coverage of four European aerospace stocks with Buy ratings. (ROMEO GACAD/AFP via Getty Images)

Key Points

About This Summary

• Goldman Sachs highlights the recovering aerospace market, driven by increased travel demand and aftermarket profitability.
• Analyst Sam Burgess initiates coverage on Airbus and favors Safran, Rolls-Royce, and Melrose Industries, all rated as Buy.
• The four stocks are up 41% this year; Airbus has a price target of $271, Safran $400, Rolls-Royce $17.40, and Melrose $9.90.

Goldman Sachs is feeling good about the European aerospace market. It has four new ways for investors to gain exposure to the sector.

After a period of volatility induced by the Covid-19 pandemic, airlines are adding new jets to meet rising travel demand. “This demand has outstripped supply, leading to capacity shortages for airlines and delivery challenges for airframers,” wrote Goldman analyst Sam Burgess in a Friday report. “Conversely, the aftermarket is enjoying a ‘harvest period’ of exceptional profitability, driven by pricing power from high MRO, [Maintenance, Repair, and Operations], demand and longer engine lifecycles.”

In short, things are good for jet makers and parts makers. And Burgess has four new Buy-rated stocks for investors.

He launched coverage of Airbus stock with a Buy rating and 230 euros ($271) price target. “Valuation remains attractive and incipient supply chain [improvement] means [a] good time to buy.”

Airbus stock added 1.3% to €193.86 in overseas trading. The S&P 500 and Dow Jones Industrial Average gained 0.5% and 0.4%, respectively.

He also likes shares of European jet engine makers Safran and Rolls-Royce. Safran has “pricing power,” and shop visits for engines on planes are ramping up. Rolls-Royce also has a power systems business that can provide backup electricity for data centers.

His target for Safran stock is €340 ($400). His target for Rolls-Royce stock is 12.90 pounds ($17.40). Safran stock rose 2.4% to €291.60 on Friday. Rolls-Royce stock was up 1.8% at £11.50.

Aerospace parts supplier Melrose Industries is “the cheapest stock in the aftermarket subsector,” wrote Burgess. Shares trade for 15 times estimated 2026 earnings. Safran shares trade for 27 times. Part of the reason is that it has a lot of debt. Enterprise value to 2026 estimated earnings before interest, taxes, depreciation, and amortization, or Ebitda, a common measure of financial leverage, is about 10 times. A ratio of two times is more typical for an industrial company. Burgess has “conviction” that the company will meet its obligations.

His price target for shares is £7.30 ($9.90). Melrose stock gained 0.7% to £5.98.

Overall, 63% of analysts covering Melrose stock rate shares Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The Buy-rating ratios for Safran and Rolls-Royce are 67% and 68%, respectively. The Buy-rating ratio for Airbus stock is 79%.

Coming into Friday trading, all four stocks were up this year by an average of about 41%.

Write to Al Root at allen.root@dowjones.com