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We Think These Aircraft Engine-Makers Are Undervalued

GE and Rolls-Royce are our top picks in the wide-body commercial aircraft industry.

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.

Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.