EADS : A technical rebound

06/07/2012 | 10:44am Opinion : Bullish above 26.1 EUR Target price : 29.4 EUR Stop loss: 24.9 EUR

EURONEXT PARIS Aerospace / Defense

For a month, there are a lot of news about EADS. On May 16th, the European group published its quarterly results. These have been mostly positive, although EPS was well below analysts’ estimates. This difference can be explained by the problem of cracks on the wings of some A380 which can cost 260 million euros to EADS. The security had reacted well and then had been carried away by the decline of its index.

In addition, at the end of May, Louis Gallois, CEO of EADS gave his place to Tom Enders. This transition was long anticipated and did not cause major upheaval.
Today, Airbus announced that it booked 132 net orders between January and May. Last year, over the same period, the book was only 97. The subsidiary is still behind its main competitor, Boeing, which had booked 418 net orders. This can be explained by the launch of its new B737.

From a fundamental viewpoint, the company remains not very expensive with a PER of 14.9x in 2012 and it reduces sharply in the coming years. Analysts estimate it at 10.7x in 2013 and 8.7x in 2014. The EV/EBITDA remains well below Boeing’s one, with 3.10x for this year and 2.45x next year. The group is working hard on its operating margin to catch up its competitor. The stock has a great defensive dimension since it has a yield of 2.22%. Revisions of sales are rising for a year. Revisions of EPS are also increasing since January 2012.

Empirically, we see an inverse correlation between the price of EADS and the euro/dollar. A drop of the euro in the coming weeks could lead to increasing price. However, we must remain cautious for two reasons. On the one hand, if gas prices continue to decline, airlines may delay the renewal of their fleet. Moreover, the costs associated with problems of defective A380 might increase significantly.

Technically, the stock has experienced a severe punishment after testing several times the EUR 31.1 resistance. While moving averages are trending down, a trend reversal seems to be taking place. Indeed, a good technical rebound on the support of EUR 25.6 was reached in early June. The EUR 27.8 resistance would be achieved quickly in the coming days. If buyers are able to take power, it could be broken and 50-days moving average of EUR 29.3 will serve as a new resistance.

Due to the graphical analysis, investors can buy the stock close to EUR 26 in order to benefit from a better trading opportunity. The target price is EUR 29.4. In order to avoid important losses, a stop loss will be fixed at EUR 25.

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