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EADS RESULTS

EADS – ONWARDS AND UPWARDS
By Howard Wheeldon, Senior Strategist at BGC Partners

09 Mar 11. With revenues up just 7% to EUR45.8bn in FY10 and having demonstrated a welcome return to a positive EUR1.2bn EBIT the manufacturer of Airbus planes has at the very least been able to silence some of its critics. Better still is that EADS ended the year sitting on a whopping record net cash position of EUR11.9bn and which I might add equates to near two thirds of the company’s EUR16.2bn market capitalisation! However whilst we welcome the significant underlying improvement in the FY10 result our end of term report concludes good but still needs 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 would also expect airplane delivery rates to improve in FY11 along with the possibility of some pricing improvement. However 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 in balancing the currency need and forward perspective. That was not to be although EADS Chief Financial Officer Hans Peter Ring was in very positive mood this morning talking the prospect for increased acquisition activity in 2011. And with strong free cash flow of EUR2.7bn last year providing ample resources for future acquisition we may at least hope that this year the dream can at last be turned into reality.

Meanwhile it is pleasing that EADS has returned to the dividend list with shareholders receiving EUR0.22 per share. That may not seem much given that shares are just EUR1 higher today than when EADS shares 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 together with better execution of the A400M military airlifter programme are the most serious challenges facing EADS. The company also says that 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 for EADS will 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 whilst 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 the company 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

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