Why did JANA Partners buy a position in Airbus Group?



JANA Partners and Airbus Group

JANA didn’t disclose the size of its investment in Airbus Group NV (EADSF), but the fund believes Airbus is the superior opportunity within aerospace. Less governmental interference, a potential launch of the new A350 this year, and cash on the balance sheet make the stock an attractive opportunity, according to the fund.

Airbus stats

JANA Partners’ fourth quarter letter said that in 4Q 2012, the fund had built a position in Boeing (BA), as the market’s misunderstanding of the 787 battery issue created an attractive entry point. Boeing went on to become one of the fund’s most successful investments in 2013.

The letter adds:

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  • “When we compare Airbus today to Boeing at the time of our initial investment we see that Airbus has a bigger backlog, less exposure to the defense end market, greater balance sheet cash per share and at our respective entry points, was offered at a lower multiple of free cash flow (normalized for temporary new model launch costs). We like the global aerospace cycle and the wide moat around the Airbus business. Just as BA’s stock was revalued in 2013 with the resolution of the 787 battery crisis, the acceleration of deliveries, expanding margins and the return of capital to shareholders, we see numerous events in 2014 that will serve to unlock value in AIR’s shares.”

The letter further states:

  • “The French and German governments have fully relinquished their board control, relieving CEO Tom Enders to run the business for the benefit of the owners. He has committed to a significant cost reduction program and is targeting operating margins of 10%, in line with BA’s and a long way from AIR’s current 6% margins. The A350, Airbus’s response to the Boeing 787, is progressing toward regulatory approval, with test flights successfully accomplished on the timeline management expected so far. To be sure, there could well be hiccups along the way, but at a recent investor day, management outlined expectations for 2015 earnings, excluding losses from the A350 launch, of €5.50 ($7.43) per share. At BA’s current multiple, this would equate to an AIR FP share price of €95 ($128.3) as compared to the €57 ($77) where it is currently quoted. We believe that as management executes and the A350 gets closer to launch, the multiple of AIR will expand. Another catalyst is the €10 ($13.5) per share of net cash on the balance sheet, which may be prudent to hold as insurance against A350 cost over-runs, but will grossly exceed necessary cash at the time of the launch if the A350 program remains on track.”

The Airbus A350 XWB, which is a fuel-efficient twin-engine jet aircraft, is expected to rival Boeing’s 787 Dreamliner, and is scheduled to enter airline service in mid-2014.

Airbus said last month that it has exceeded commercial targets in 2013, achieving a new record of 626 aircraft deliveries to 93 customers (15 new) and a new industry record of 1,619 gross orders. Airbus claimed it has overtaken U.S. rival Boeing (BA) in terms of market share, with record deliveries and orders in 2013.

In July 2013, Airbus parent EADS confirmed plans to reorganize into three divisions and change its name to Airbus. In December 2013, the company presented a restructuring plan for its future Airbus Defence and Space Division (Airbus DS). This followed a decision by the EADS board in July last year to consolidate the defense and space businesses of the group into one new division and to rebrand EADS into “Airbus Group.” The restructuring is aimed at improving competitiveness in defense and space by cutting costs, eliminating product and resource overlaps, creating synergies in operations and product portfolio, and better focusing research and development efforts. The plan involves 5,800 job losses and could see $1 billion in savings, according to news reports.


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