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MTU Aero Engines (OTCPK:MTUAY) (OTC:MTUAF) is a German manufacturer of aviation engines. MTU Aero Engines combines the best of the US, Europe and Asia in the aerospace manufacturing industry.

MTU Aero Engines is one of the leading aircraft engine manufacturers, but virtually unknown to the general public.

All major players in the aerospace industry work with MTU:

FUNDAMENTALS

Financial Data Sources

All financial data used is from reports published by MTU Aero Engines. Remarks about the (financial) data published:

  • Exchange rate used EUR/USD 1.38
  • Stock price 96.53 USD / 69.95 EUR
Corporate20122011201020092008
Revenue$4,662$4,046$3,736$3,603$3,760
Net income$240$220$196$195$248
EBIT$414$396$370$341$343
EBIT%8.88%9.80%9.90%9.46%9.11%
FCF-$185.6$177.7$202.7$165.9$170.6
Dividend$1.86$1.66$1.52$1.28$1.28
Dividend Yield1.93%
EPS$4.73$4.37$3.91$3.86$4.89
ROA4.08%4.26%4.15%4.48%5.62%
ROCE11.44%15.28%13.99%14.75%16.25%
ROE15.96%18.59%17.36%19.30%29.11%
Debt/Equity2.913.363.183.314.18
PE (Price/Earnings)28.14

(x1m with the exception of Dividend and EPS)

  • Revenue is steadily increasing;
  • Dividend is good;
  • Free Cash Flow is declining;
  • Fundamentals are acceptable at first glance;
  • Stock is on the high end with a PE of 28.

MTU Aero Engines is Germany's leading aircraft engine manufacturer and has 3 main activities:

Commercial engines: Original Equipment Manufacturers [OEM] and spare parts. MTU designs, develops and manufactures engine modules and components. MTU works with leading engine manufacturers and is a risk-and-revenue-sharing partner.

Military engines: the main customer are the German Armed Forces. MTU also participates in all major European aircraft programs such as the Eurofighter Typhoon or the new Future Transport Helicopter, where Airbus Group wants to cooperate with Boeing .

Maintenance, repair and overhaul [MRO]: MTU is the world's largest independent provider of maintenance, repair and overhaul services for commercial aircraft engines. MTU has maintenance facilities on strategic locations and especially the largest MRO engine facility in China, is promising.

(click to enlarge, x1m )

Commercial engines and maintenance are increasing, while military revenue remains the same. Most revenue is generated in the United States. Asia doesn't generate a lot of revenue, but has a lot of growth potential as the investing in the MRO facility in China will probably show in the future.

Maintenance20122011201020092008
Revenue$1,802$1,541$1,482$1,459$1,536
EBIT$150$124$108$84$69
EBIT%8.31%8.06%7.28%5.73%4.47%

(x1m)

The profitability of maintenance is increasing. Combined with the increasing maintenance revenue this is promising.

Engines20122011201020092008
Revenue$2,907$2,548$2,296$2,188$2,267
EBIT$268$276$263$260$279
EBIT%9.21%10.84%11.44%11.89%12.30%
EBIT adjusted$365$330$317$316$386
EBIT% adjusted12.57%12.94%13.80%14.45%17.04%

(x1m)

Revenue is growing, but EBIT is declining.

(click to enlarge)

The free cash flow is also declining as well as the (adjusted) EBIT% for commercial and military engines.

The decrease in cash flow is caused by military orders which are not being paid in advance.

Another cause is MTU's increased stake in International Aero Engines which produces the V2500 engine, because Rolls-Royce sold its stake in IAE. The V2500 is one of the main revenue generators of MTU.

Also, the economic outlook for General Electric's F414 engine for the F-18 Super Hornet deteriorated and led to a write down.

The decrease in EBIT% is also caused because the sale of new engines is less profitable than spare parts for older engines.

FUTURE

The future looks bright for MTU. It has strategic partnerships with most important aircraft engine manufacturers. Both Boeing, Airbus and the smaller Bombardier and Embraer aircraft use engines maintained or (parts are) manufactured by MTU Aero Engines. For MTU it is a win-win situation.

Although there are cash flow problems and EBIT has decreased last few years, these are not indicators of deeper issues and they are only temporary in nature.

Growth in Asia will increase revenue and current R&D investments in fuel-efficient engines such as the GTF will replace the current V2500 cash cow in the near future.

Meanwhile maintenance and overhauling older engines, as well as the manufacturing of aftermarket parts is a profitable business.

INVESTING

(click to enlarge)

The stock is bit expensive now and is dropping in price (and might drop another 10-15%)

Instead of catching a falling knife it is better to wait until MTU Aero Engines bottoms. Growth potential is there and the dividend is also attractive.

Source: MTU Aero Engines: German Quality All Over The World