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EADS has sprung a pleasant surprise on markets with good 2012 results and a buoyant outlook. However, the current strength of the pan-European defence and aerospace group leaves intact the cyclical vulnerability that its failed merger with BAE Systems last year was supposed to correct. Judged by this long-term challenge, the market's joy may be slightly over the top.
The group is working hard to make investors forget the faltered merger. It has raised its dividend by a third and intends to buy back up to 15 per cent of its stock, as planned in the original merger plan.
In the short to medium term, EADS' position looks strong. In 2013, management aims to increase earnings before interest, taxes and one-off effects by 17 per cent to €3.5-billion ($4.7-billion). EADS' order book stands at €566.5-billion, about 10 times its annual revenue. The company recently also revamped its shareholder structure, notably reducing the French and German governments' influence over management's decisions.
Looking at a longer-term horizon, however, EADS isn't invulnerable. Its current success still massively rests on Airbus, its civil airliner. It benefits from a global surge in demand for passenger jets triggered by strong economic growth in emerging markets, as well as a shift to more fuel-efficient jets. However, the company faces tough competition from U.S. rival Boeing. And it had to acknowledge that the schedule for its latest model, the A-350, remains challenging.
Dependence on a cyclical market was one of the key problems the merger with BAE Systems was supposed to address. EADS' defence business, which generates only about 20 per cent of the company's revenue, is still too small. On top of synergies in research and development, the deal would also have created a solid company operating in two related but independent markets. The military market is less volatile, although currently caught in a downswing caused by governments' need, the world over, to reduce their spending.
While EADS isn't under short-term pressure, the arguments in favour of a deal remain valid. In the long run, industrial logic may one day prevail over the vagaries of Europe's politicians.