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December 12, 2013 7:39 pm
The only way is up at EADS. Since the breakdown of its merger with BAE Systems in October last year, shares in the maker of the Airbus fleet of aircraft have climbed 80 per cent (BAE shares are up a quarter). Investors have fallen in love with what chief executive Tom Enders disliked – the fact that EADS is a commercial aircraft maker with a suboptimal defence business attached. Balance? Who needs it?
EADS’s exalted share price reflects the boom in the commercial aircraft market and Airbus’s record of winning business from the world’s airlines. There is no longer any doubt over its ability to compete with Boeing on that front. Airbus won orders of €40bn in the third quarter; Boeing won $27bn.
Two other factors are key. The share price rise reflects, at least in part, relief that the BAE move was scuttled. EADS’s shares fell when the merger plan became public because investors believed the terms offered too much value to BAE. It also shows how investors appreciate what Mr Enders is doing – including a dividend payout ratio of up to 40 per cent – to improve the operational and financial performance of what had become an unwieldy and poorly integrated group.
The biggest immediate risk to the share price is that Mr Enders’ plan to integrate its defence and space units will fail to deliver real savings. He has set an earnings before interest and tax margin of 8 per cent of revenue for 2015, compared to under 5 per cent today. Achieving it would double ebit to about €1bn. But there is execution risk – Airbus Military, a €2bn business, is barely profitable, for example.
EADS will soon be renamed Airbus Group, with AIR as its new stock symbol. Its shares trade on a 2014 price to earnings multiple of 15. That is still below Boeing’s 18, so there is scope for more. But the AIR always gets thinner the higher one climbs.
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