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The Jet Engine Giant Ready for Sustainable Flight

Investment Thesis: Safran commands an unassailable wide-moat business through its dominant position in aerospace propulsion (70% of EBIT), leveraging ultra-high barriers to entry, decades of technical expertise, and sticky long-term customer relationships that generate recurring revenues through maintenance contracts, spare parts, and Rate Per Flight Hour (RPFH) agreements.

Huge Switching Costs with Recurring Revenue

Safran's business model centers on mission-critical propulsion systems where switching costs are prohibitive and customer relationships span decades. Through CFM International (50-50 JV with GE Aerospace), Safran powers 75% of global narrow-body aircraft with its CFM56 and LEAP engines.

Why It's Essential:

• Safety-critical systems: Aircraft engines cannot fail—airlines stake their reputation and passenger lives on reliability

• Regulatory certification: New engines require 5-7 years and $10+ billion in development and certification

• Infrastructure lock-in: Airlines invest heavily in training, tooling, and spare parts inventory specific to each engine type

Stickiness Factor - Extraordinary:

• LEAP Rate Per Flight Hour (RPFH) contracts: Airlines pay per flight hour, creating predictable recurring revenue streams over 20+ year aircraft lifespans

• Maintenance monopoly: Only Safran can provide genuine spare parts and certified maintenance for CFM engines

• Installed base momentum: With nearly 4,000 LEAP engines in service and growing, the aftermarket revenue stream compounds annually

• Long-term contracts: Multi-billion dollar engine orders with 10-15 year delivery schedules create revenue visibility

The aftermarket generates 2-3x higher margins than original equipment, with civil aftermarket revenue growing 25% in 2024 driven by post-COVID traffic recovery.

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Competitive Analysis: David vs. Goliaths, But David Has the Slingshot

Safran faces three primary competitors, but its unique positioning through CFM International provides decisive advantages:

Top 3 Competitors:

1. GE Aerospace (Partner & Competitor)

• Market share: 16% standalone (53% including CFM)

• Strengths: Widebody engine leadership (GEnx, GE90), military expertise

• Weakness: Dependent on CFM partnership for narrow-body dominance

2. Pratt & Whitney (RTX)

• Market share: 26% overall

• Strengths: Geared Turbofan technology (GTF), A320neo alternative

• Critical Weakness: PW1000 durability issues forcing mass groundings and $billions in compensation

3. Rolls-Royce

• Market share: 18%

• Strengths: Widebody focus (Trent series), premium positioning

• Weakness: Limited narrow-body presence, smaller scale

What Makes Safran Superior:

1. Narrow-body Market Domination

• CFM engines power 72% of active narrow-body fleet globally

• Exclusive engine for Boeing 737 MAX (LEAP-1B) and co-dominant on A320neo (LEAP-1A vs. troubled GTF)

• Narrow-body market is 80%+ of global aircraft deliveries

2. Reliability Advantage

• LEAP engines approaching 50 million flight hours with excellent reliability record

• Pratt's GTF reliability issues create competitive opportunity

• Advanced machine learning health monitoring provides predictive maintenance edge

3. Scale Economics

• 1,407 LEAP deliveries in 2024 vs. competitors' smaller volumes

• €1+ billion investment in global MRO network expansion

• Shared development costs with GE reduce financial risk

4. Technology Leadership

• RISE program developing next-generation sustainable engines

• 15% fuel efficiency improvement over previous generation

• First-mover advantage on sustainable aviation fuels (SAF) compatibility

ROIC Profile: Strong But Below Our 15% Threshold

Current ROIC Analysis:

• 2024 ROIC: ~12.7% (GuruFocus data)

• WACC: ~9.2%

• Economic Profit: Positive 3.5% spread

ROIC Breakdown:

• NOPAT Margin: Strong at 15.1% (€4.1B operating income on €27.3B revenue)

• Asset Turnover: Moderate due to capital-intensive manufacturing

• Historical Range: 6.15% - 12.7% over recent years

Why Below 15%:

1. Capital Intensity: Massive R&D investments (€646M in H1 2024) for next-gen engines

2. LEAP Transition Costs: New production facilities and working capital buildup

3. Geographic Expansion: €1B+ MRO network investments globally

Improving Trajectory:

• LEAP RPFH Recognition: Starting 2025, profit recognition begins on LEAP-1A maintenance contracts

• Aftermarket Mix Shift: Higher-margin services growing faster than OE sales

• Operational Excellence: 150bp margin improvement in 2024 to 15.1%

VERDICT: While currently below our 15% ROIC threshold, Safran shows strong momentum toward achieving this target by 2026-2027 as LEAP aftermarket matures and operational leverage kicks in.

Valuation: Multiple Approaches Point to Fair Value

DCF Analysis:

Base Case Assumptions:

• Revenue CAGR: 8-10% (2025-2030) driven by air traffic recovery and LEAP ramp

• FCF Growth: €3.0-3.2B (2025) growing to €4.5-5.0B (2030)

• Terminal Growth: 2.5% (GDP-plus growth)

• WACC: 9.2%

DCF Fair Value: €320-340 per share

Sum of Parts:

• Propulsion (70% of EBIT): 18x multiple on €3B EBIT = €54B

• Equipment & Defense (30% of EBIT): 15x multiple on €1.3B EBIT = €19.5B

• Aircraft Interiors: Break-even, minimal value = €0.5B

• Total EV: €74B

• Net Cash Position: €0.4B

• Equity Value: €74.4B / 417M shares = €178 per share

Note: SoP appears conservative vs. DCF due to quality premium deserved by propulsion moat

Exit Multiples:

• EV/Sales: 2.4x (vs. industry 2.0-2.8x range)

• EV/EBIT: 16.5x (vs. high-quality industrials 15-20x)

• P/E: 38x (premium to aerospace peers at 25-35x due to growth quality)

Fair Value Range: €300-340

Expected CAGR: Double-Digit Returns Through the Cycle

Base Case CAGR (2025-2030): 12-15%

Revenue Growth Drivers:

• Air traffic recovery: Global RPK growth 4-5% annually

• Fleet renewal: Airlines upgrading to fuel-efficient LEAP engines

• Aftermarket expansion: Installed base growing from 4,000 to 8,000+ LEAP engines

• Defense growth: Geopolitical tensions driving military spending

Margin Expansion:

• Aftermarket mix shift: From 40% to 50%+ of propulsion revenue

• LEAP profitability: Zero-margin RPFH contracts begin recognizing profit 2025+

• Operational leverage: Fixed cost absorption on higher volumes

• Pricing power: Duopoly market structure enables regular price increases

Capital Allocation:

• €5B share buyback program: Commenced 2025, ~2.5% annual yield

• €2.90 dividend: +32% increase, 1.0% yield

• Growth investments: €1B+ MRO expansion capturing service margin

Risk-Adjusted CAGR: 10-12% accounting for cyclical downturns and execution risks

Current Valuation vs. Price Target

Current Price: €280 (September 2025) Fair Value: €320-340
Upside Potential: 14-21%

Analyst Consensus: €304 average target (range €219-370)

Recommendation: BUY

• Trading at reasonable 16.5x EV/EBIT multiple for quality moat business

• LEAP aftermarket inflection beginning 2025

• Multiple expansion opportunity as ROIC approaches 15%+ threshold

• Defensive growth exposure to secular air travel trends

Key Catalysts:

1. Q4 2025: First LEAP-1A RPFH profit recognition

2. 2026: MRO network expansion completion

3. 2027+: RISE engine program milestones

4. Ongoing: Share buyback execution and dividend growth

Risks:

• Economic downturn reducing air travel demand

• Boeing 737 MAX production issues

• Competition from sustainable propulsion technologies

• Geopolitical restrictions on aerospace trade

I see a wide economic moat that should drive above-market returns as the LEAP aftermarket cycle matures and operational leverage accelerates margin expansion toward our 15%+ ROIC target. Right now it sits on my watchlist, which you can access in real-time in our community.

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