More than a decade after its formation, Franco-German aerospace colossus EADS (EAD) has finally got its act together. Its Airbus division is growing profits at breakneck speed and an industry boom has years to run. Margins are improving all the time, too, and putting a stop to endless political meddling has created perfect conditions to buy the world's second-largest aerospace company on the cheap.
- Record profits expected in 2013
- Airbus has eight-year backlog
- Less political interference
- Share buy back
- Possible delays to A350
- Awaiting outcome of strategic review
Last year's failed attempt to merge with BAE Systems (BA.) and snatch the number one spot from Boeing is the reason investors could turn a handsome profit by buying in to EADS now. Berlin sank the €36bn (£30.7bn) deal, so furious chief executive Tom Enders drove through a new governance pact, stripping both France and Germany of their right to pick key board members and veto big decisions. It also slashes their shareholdings from over 22 per cent to just 12 per cent each.
But while the reduced government involvement would normally be expected to cause a re-rating, the pressure created by the stock overhang resulting from the changes has presented a buying opportunity. French media giant Lagardère and Daimler - proxy holders for the French and German governments respectively - have just each sold their 7.4 per cent stakes. The French and Spanish governments are sellers, too, with 5.4 per cent still to offload. So EADS' shares fell 13 per cent from their peak at €42.58 last month before beginning to rally on news of the Daimler sale. However, a €3.75bn share buy-back programme is mopping up stock and the share price is unlikely to hang around now most of the overhang has cleared.
Indeed, EADS' shares rocketed after the BAE fiasco and again after knockout results in late February. Airbus led a 15 per cent jump in revenue last year to €56bn, a two-thirds increase in underlying operating profit to €3bn, and a 61 per cent surge in underlying EPS to €2.24. Margin of 5.3 per cent beat estimates, too, and should improve again in 2013 as Airbus works through its record backlog. Mr Enders wants the group to achieve a 10 per cent underlying margin in 2015.
That may sound ambitious, but EADS is actually notoriously conservative. It's only predicting €3.5bn of operating profit in 2013, giving underlying EPS of €2.50, but analysts at Deutsche Bank aren't fooled. EADS has typically beaten its own initial guidance by at least 20 per cent for the past five years, and the broker expects EPS of €2.76 in 2013 (see table). A small currency headwind this year is expected to turn into a £200m annual tailwind for the following three years, which will help.
EADS' shares would trade at 14.1 times forecast 2013 earnings, dropping to just 10.6 times in 2014, which represents a discount of almost a quarter to the commercial aerospace sector. In fact, applying a sector average 2014 multiple to EADS' shares puts a value on them of over €50. If the perception of EADS as a company heavily influenced by national interests wanes, even a valuation at the sector average 2014 forward PE ratio of 14 could prove undemanding given the phenomenal growth in earnings on offer. In the past, sector multiples have peaked at nearer 18 times earnings.
EADS (EAD) | ||||
|---|---|---|---|---|
| ORD PRICE: | €39.02 | MARKET VALUE: | €31.4bn | |
| TOUCH: | €39.01-€39.02 | 12-MONTH HIGH: | €42.58 | LOW: €24.25 |
| DIVIDEND YIELD: | 3.8% | PE RATIO: | 11 | |
| NET ASSET VALUE: | €12.52 | NET CASH: | €12.3bn | |
| Year to 31 Dec | Turnover (€bn) | Pre-tax profit (€bn) | Earnings per share (€) | Dividend per share (€) |
|---|---|---|---|---|
| 2009 | 42.8 | -0.97 | -0.94 | nil |
| 2010 | 45.8 | 0.82 | 0.68 | 0.22 |
| 2011 | 49.1 | 1.39 | 1.27 | 0.45 |
| 2012 | 56.5 | 1.68 | 1.50 | 0.60 |
| 2013* | 58.2 | 2.97 | 2.76 | 1.10 |
| 2014* | 63.5 | 3.72 | 3.66 | 1.50 |
| % change | +3 | +77 | +84 | +83 |
Beta: 0.6 *Deutsche Bank forecasts £1=€1.17 | ||||
Of course, there are lots of moving parts to EADS' vast business - a 46 per cent stake in Rafale jet maker Dassault Aviation is worth €5 a share, net cash of €12.3bn another €15, and there are hefty pension costs. Analysts have also included a €2bn provision worth €2.50 a share to cover any problems with Airbus's answer to Boeing's 787, the A350 - it takes to the skies this summer and passenger flights should begin in late 2014. That's sensible, given costly delays and the subsequent problems that plagued both the 787 and Airbus's own A380 jumbo. Ongoing development will burn cash, too.
Still, Airbus's backlog stretches out to nearly 5,000 planes and almost eight years. And with demand underpinned by rapid growth in emerging markets and a drive for more fuel-efficient planes in the west, orders are tipped to outstrip deliveries again in 2013. There were 431 planes ordered in the first quarter alone, including one order for 234 planes from Indonesia's Lion Air worth $24bn (£15.6bn). More are inevitable, possibly before the Paris Air Show in mid-June.
Later in the summer, we should hear the outcome of a potentially significant strategic review. If the group decides to grow the defence business, currently dominated by struggling Eurofighter unit Cassidian, where profit more than halved to €142m last year, Mr Enders may have another crack at BAE after German elections in September. Alternatively, he could spin off the military arm completely. Either route risks war with Berlin, though.
