BGC Partner's Howard Wheeldon says EADS has silenced its critics but it can do better.
With revenues up just 7% to Eu45.8bn in 2010 and having demonstrated a welcome return to a positive Eu1.2bn EBIT, aerospace group EADS has at the very least been able to silence some of its critics. Better still, the manufacturer of Airbus planes ended the year sitting on a whopping record net cash position of Eu11.9bn, which equates to nearly two thirds of the company’s Eu16.2bn market capitalisation.
However, while we welcome the underlying improvement in the 2010, our end of term report concludes with a good result but there is still the need to do very much better. Can EADS do better? From a financial performance point of view, the answer has to be yes, but not before production performance on the A380 has significantly improved. Can that be done? Yes, and we believe that the current year will show much better financial performance in the production of the largest Airbus plane. We also expect airplane delivery rates to improve in FY11, along with the possibility of some pricing improvement.
Whilst there appears to be a greater possibility that hedging rates might be more stable in FY11, we will continue to reserve judgement on how hedging responsibility will affect performance through the coming years. Like others, we might have hoped that if EADS had won the US tanker competition and gone ahead with the development of the Alabama plant that this would ultimately help to balance the currency need and forward perspective. That was not to be, although EADS chief financial officer Hans Peter Ring was in a very positive mood this morning talking about the prospect for increased acquisition activity in 2011. And with strong free cash flow of Eu2.7bn last year, providing ample resources for future acquisition, we may at least hope that this year the dream can be turned into reality, at last.
Meanwhile, it is pleasing that EADS has returned to the dividend list with shareholders receiving Eu0.22 per share. That may not seem much given that EADS shares are just €1 higher today than when they were floated eleven years ago. Even so, following some particularly difficult years since 2006, it is certainly worth noting that the shares have effectively doubled over the past two years.
EADS warned today that the time schedule for entry into service of the A350 XWB currently planned for late 2013 remains “challenging”. This, together with swinging round A380 performance and better execution of the A400M military airlifter programme, are the most serious challenges EADS faces. The company also said it will deliver between 520 and 530 planes this year, and that it expects orders to be above deliveries. All this is good news of course and while we suspect that EADS shares will continue to edge up, the route ahead fwill hardly be plain sailing.
Better execution of deliveries and, through that, improved financial performance will be what convinces markets that EADS has come of age. From a product perspective, while it is true that the A380 has a very long way to go before it might hit real profitability, we are at least more comfortable about the prospects for getting the A350 XWB programme right. We are told nothing new this morning about the A400M programme other than to be reminded how the provisions on this programme have weighed down Airbus Military profit.
Undoubtedly the loss of the US tanker programme is a real blow for EADS, not only in terms of the product prestige and ability to develop further into the US, but also in terms of the need to better balance the company between Airbus and Military. But while EADS has, in my view, rightly decided not to challenge the US tanker decision this is not to suggest that it is in any mood to stand still.
This past year has seen many announcements from the company, not least the decision to go ahead with A320neo (new engine option). All this is positive enough, but unless there is further improvement in margins markets may yet lose patience. Removing cost is not something that EADS has shied away from in the past and there should be further margin for enhancement to come from the last round of cuts related to Power8.
Whether further Power8-related benefits will be enough to satisfy investors is a more difficult question to answer and it may well be that EADS will need to invest in another round of cost cutting measures in due course. For now, though, we can remain satisfied that, with an already excellent order book that was further enhanced in 2010 and is already looking positive for 2011, Airbus deliveries likely to be up this year and military and most other areas looking reasonably satisfactory despite concerns on defence spending, the mark up in the shares today is more than fully justified.
Howard Wheeldon is the senior strategist at BGC Partners