We look forward to receiving Lakewood Capital’s investor letters every quarter. Anthony Bozza is a skilled short seller and he provides detailed write-ups in 3-4 companies in each newsletter. We will provide a detailed analysis of Lakewood Capital’s historical 13F stock picks in the coming issues of our monthly newsletter. In this article we will share excerpts from Lakewood Capital’s 2017 Q3 investor letter.
Lakewood Capital delivered a net gain of 3.9% during the third quarter. It is about 50% net long, so this is actually a better risk adjusted performance than the S&P 500 ETFs. The fund’s biggest contributors are Baidu, Adient, and Ally Financial but you don’t need to have access to Lakewood’s investor letter to figure out its best performing positions. You can check out its latest 13F filing to see the entire list of US securities it is invested in.
We want to share some of its new investment ideas in this article. Anthony Bozza believes Airbus is undervalued and on the cusp of delivering a 50% gain over the next couple of years. Here is what he said about the stock:
During the quarter, the fund initiated a long position in Airbus, a global manufacturer of aircraft and military equipment. The company has a roughly 50% share of the duopolistic commercial aircraft manufacturing industry, which is experiencing solid growth due to increased replacement demand, expansion at low cost carriers and growing air traffic, particularly in Asia. We believe Airbus’s earnings are currently depressed as it ramps up some key new programs, and a record backlog (the company is basically sold out until 2022) could drive significant earnings growth in the coming years and lead to a significantly improved valuation for the stock.
Airbus’s A320 family of narrow body aircraft represents the company’s biggest profit contributor. Recently, Airbus launched a new engine option for the A320 with improved fuel efficiency that generates 15% greater profits per plane. However, one of the two engine suppliers, Pratt & Whitney, has encountered challenges with the new engine type, causing delays in the delivery ramp. Based on our research, we believe the issues have been identified and will likely be fixed in the coming quarters. In the meantime, Airbus has been forced to sell additional older engine models at a discount, impacting near-term margins. Airbus should ramp production from 567 planes this year to 690 planes by the middle of 2019, and combined with higher profit margins, the A320 program should drive an incremental €2.25 of EPS for the company.
Additionally, Airbus has recently begun delivering a new, clean sheet wide body aircraft, called the A350, which is temporarily depressing earnings. Clean sheet aircraft are expensive to build with significant development costs disproportionately expensed in the early phase of the program, leading to large upfront losses. In 2016, Airbus lost €1.3 billion on the A350, but as deliveries continue to ramp and upfront costs subside, the company should break even within three years. Longer-term, we believe that the A350 can make around €18 million per plane, which would generate €2 billion of EBIT or roughly €2 per share after tax.