EADS downgraded to "reduce"

05.10.06 - AC Research

LONDON, October 5 (newratings.com) - Analyst Henning Wagener of AC Research downgrades EADS (EAD) from "hold" to "reduce."

According to AC Research?s research note dated October 4 and published this morning, the company has announced a considerable delay in the delivery of the Airbus 380. The first A380 is designed for delivery in 2H07, followed by 13 aircraft in 2008. The company plans to deliver 25 and 45 A380s in 2009 and 2010, respectively.

The further delay in the delivery of the A380 by approximately one year will result in a total loss of about ?4.8 billion in earnings up to 2010 for EADS, with about ?2.8 billion resulting from excess costs and payments for delayed deliveries. For the ongoing fiscal year of 2006, EADS expects a negative EBIT effect of ?1.1 billion. Therefore, the company may not be able to keep its 2006 forecasts. For the time being, EADS is not prepared to offer any updated forecasts for the current fiscal year.

The analyst considers the repeated delay in the delivery of the A380 as very negative. Some customers may cancel their contracts. At the same time, the company has announced its plans to cut costs by at least ?2 billion annually from 2010, through the implementation of a programme of cost reduction and restructuring.

At the current share price of ?21.08 and a 2007 P/E ratio of about 16, the company?s stock seems to enjoy a rather ambitious rating, considering the financial consequences of the repeated delays in the delivery of the A380. Moreover, one may not exclude that some customers will cancel their contracts, the analyst points out. The principal objective of EADS should be to get a quick handle on the problems with respect to the A380, in order to keep the damage for the company?s image within tolerable limits. Considering the bad news flow, AC Research expects the company?s stock to slightly underperfom the overall market over the next few weeks.

AC Research downgrades EADS from "hold" to "reduce."