Airbus at `Less Than Zero’ Value Still Loses Altitude

May 23 (Bloomberg) — Airbus SAS, the world’s largest commercial aircraft maker, is valued at “less than zero” after this year’s 32 percent drop in the shares of parent European Aeronautic, Defence & Space Co., according to Lehman Brothers Holdings Inc. analyst Joe Campbell.

“The market is viewing Airbus as a liability, rather than an asset,” said Campbell, 62, who is based in New York and has ranked among the top five aerospace analysts for six consecutive years in an Institutional Investor magazine poll.

EADS, based in Paris and Munich, on May 13 reported an additional three-month delay in deliveries of the A380 superjumbo jetliner, which was already two years behind schedule. Before the latest setback, the company had cut its profit forecast by $6 billion through 2010.

Airbus, based in Toulouse, France, is also six months to a year late on the A400M military transport. It has a 20 billion- euro ($31.4 billion) contract with six European governments and Turkey for 180 of the planes. Additional cost overruns and penalty payments may drain cash needed for the $16 billion expense of developing the Airbus A350, a long-range jet competing with Boeing Co.‘s 787 and 777.

A February 2007 recovery plan meant to help Airbus cope with a weakening dollar as it competes with Chicago-based Boeing for dominance of the $60 billion-a-year airliner market has stumbled. The planemaker sought in part to shift investment for new planes to subcontractors who would buy Airbus plants. It chose local companies in France and Germany that lacked the capital to shoulder the risk and the plan fell apart.

The U.S. currency has lost 16 percent of its value against the euro since Airbus unveiled its reorganization.

`Bizarre Outcome’

Investors’ low valuation of Airbus is “a bizarre outcome for a large company,” Campbell, whose firm is an investment bank for EADS, said in an interview. “It reflects both the industrial challenges of engineering and making big airplane programs, and particularly and primarily, the euro trading at $1.50 or $1.60.” He rates the shares “equal weight.”

EADS’s non-Airbus assets, including helicopters, satellites, rockets, fighters and defense electronics, are worth 15 or 16 euros a share, or about where the stock is trading, estimates Campbell. Non-Airbus businesses contribute a third of the company’s sales, which totaled 39.1 billion euros in 2007.

Scott Babka and Rupinder Vig at Morgan Stanley in London say EADS without Airbus is worth 13.5 euros a share. Getting an aircraft maker for free might provide a floor for the stock, according to Vig.

Stock Falls

EADS declined 68 cents, or 4.4 percent, to 14.92 euros in Paris trading.

When EADS was founded in 2000, management promised 10 percent margins on earnings before interest and taxes by 2003. The best so far was 7.3 percent in 2005. Last year, EADS lost 446 million euros. Chief Executive Officer Louis Gallois in March 2008 forecast margins on earnings before interest and tax at Airbus “in mid-single digits” through about 2011.

Gallois, 64, became sole chief of EADS last July. Tom Enders, 49, who previously shared the top job, is now Airbus CEO, making him the fifth person to run the planemaker in three years.

“As long as Gallois and Enders and people at the top of the company can’t give any guidance that Ebit margins will go above 5 percent, there’s not a lot of incentive to buy the shares,” said Klaus Breil of Cominvest Asset Management in Frankfurt, which oversees 6 billion euros including EADS shares.

Jet Fuel

Airbus will probably experience further A380 delays, Breil said. It may need to seek 2 billion euros more in savings to counter the dollar’s decline. Meanwhile, an almost doubling of jet-fuel prices in the past year is squeezing carriers and jeopardizing aircraft production, he said.

Colin Crook, a UBS Investment analyst in London, cut EADS to “sell” May 20, citing those concerns and posting a 12-month target price of 14.50 euros.

Airbus has already said it may cut research costs. That on top of the A380 delays may compromise the planemaker’s future, says Richard Aboulafia, vice president at Teal Group, a Fairfax, Virginia-based consultant.

“Everyone needs to focus on what’s at stake here,” Aboulafia said. “The 350 is Airbus’s future; the A380 is just an interesting sideshow.”

Plane Orders

Since the A380 was launched in 2000, Airbus and Boeing have taken combined orders of about $80 billion for about 400 planes in the very large category. Orders for the A350 and 787, which are long-range aircraft with two aisles, have totaled around $400 billion in the period.

Gallois, at a May 20 briefing, promised unspecified new cost-cutting announcements before September. In an interview, he agreed with Lehman’s Campbell about EADS’s valuation.

“He’s right,” Gallois said. “Either you’re getting Airbus free or the other activities are free. In any case, the shares don’t represent the company’s value. Our shares are very linked to the dollar — I’d say too much.”

To contact the reporter on this story: Andrea Rothman in Paris

Last Updated: May 23, 2008 11:44 EDT
By Andrea Rothman

Source: Bloomberg

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