EADS Lifted by Airbus Profits

On Monday, the European Aeronautic Defence and Space Company (EADS) reported strong earnings, powered by profits from its 80%-owned subsidiary, Airbus, and from its defense divisions (or "defence," in European English). EADS has been quite successful over its short history. It was born in 2000, from the merger of the largest aerospace firms in France, Germany, and Spain.

While neither EADS nor its Airbus subsidiary currently trade on U.S. stock exchanges, EADS is making noises about buying up U.S.-based defense contractors in an effort to build market share. Said co-CEO Philippe Camus at a news conference, "If there is an opportunity to buy a small or medium-sized business in the U.S. that would give us better access to the market, why not?"

Those are sweet words to the ears of U.S. shareholders of "small or medium-sized" defense businesses. With large U.S. defense contractors such as General Dynamics (NYSE: GD  ) already said to be interested in rolling up their smaller U.S. counterparts -- Raytheon (NYSE: RTN  ) has been named as a target, for example -- and now EADS also expressing interest, current shareholders could be in for a lucrative bidding war.

For 2003, EADS posted approximately $1.9 billion in earnings before interest and taxes (EBIT), an 8% gain over year-ago earnings and about 10% more than it projected it would earn. This was despite flat revenues for the year. Free cash flow was even stronger, at $2.6 billion -- a 250% gain over last year. Of course, once you take Europe's considerable tax bite out of those numbers, actual net income was only $190 million.

EADS' space division continued to bleed red ink, though, losing half a billion dollars in EBIT after taking a restructuring charge of $360 million.

Nonetheless, the company is confident that a turnaround is underway at its space division, and that Airbus and the defense divisions will continue to provide profit growth. EADS projects EBIT growth of 17% for 2004, and is so confident in this projection that it will be raising its dividend by a third.

That confidence seems well placed. In 2003, Airbus accounted for 90% of the company's operating profit, despite spending $1.4 billion on research and development (half of all R&D spending for the year) for the A380, a planned 555-seat aircraft that should begin competing with Boeing (NYSE: BA  ) in 2006.

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Motley Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article.