Safran: The French Connection

| About: Safran SA (SAFRY)

Safran Group (OTCPK:SAFRY) is a company from France, part of the CAC 40 index but not a household name in the rest of the world. Almost certainly every reader of this article has relied on their products a number of times. Safran produces aerospace engines and with its predecessor companies has done so for more than a hundred years.

In Europe Safran Group is the second largest aerospace engine manufacturer after Rolls-Royce (OTCPK:RYCEY). Safran also partners with General Electric (NYSE:GE) for almost 40 years now [Sagan Aerospace was called Snecma at the time] to produce the successful CFM56 engine, This engine powers Boeing and Airbus airliners, who dominate the airliner market.

This is the 6th article on the global aerospace industry, which will be finished with an aerospace sector overview which includes all major aerospace manufacturers.

FUNDAMENTALS

Corporate 2012 2011 2010 2009 2008
Revenue $19,077 $16,386 $15,495 $14,787 $14,392
Net income $1,830 $686 $311 $903 -$268
EBIT $1,675 $1,152 $1,294 $820 $851
EBIT% 8.78% 7.03% 8.35% 5.54% 5.92%
FCF $896 $649 $1,202 $631 $366
EPS $3.31 $2.18 $0.69 $2.19 -$0.70
Dividend $1.32 $1.20 $0.69 $0.52 $0.35
Dividend Yield 1.79%
ROA 3.57% 4.03% 1.24% 3.41% -1.15%
ROCE 10.27% 8.75% 10.88% 6.78% 8.99%
Debt/Equity 2.68 3.04 3.07 3.04 3.46
PE (Price/Earnings) 31
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(x1m except Dividend and EPS)1

  • Revenue and profitability is increasing;
  • Fluctuations in net income are caused by currency exchange rates and financial instruments to hedge this risk. Some years it contributes very positive and other years very negative;
  • Decent dividend yield;
  • Balanced geographical spread of revenue.

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Safran Group is divided in the following divisions:

Aerospace: subdivided in Aerospace Propulsion and Aircraft Equipment. Propulsion makes engines for aircraft and helicopters and space propulsion systems. Equipment produces avionics, landing systems, transmissions and other components.

Aerospace Propulsion 2012 2011 2010 2009 2008
Revenue $9,667 $8,432 $7,734 $7,829 $8,023
EBIT $1,518 $1,285 $915 $907 $820
EBIT% 15.70% 15.24% 11.83% 11.58% 10.22%
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Safran partners with General Electric in cash cows CFM56 [that powers the Boeing (NYSE:BA) 737 and Airbus 340] and GE90 that powers the Boeing 777.

Aircraft Equipment 2012 2011 2010 2009 2008
Revenue $5,094 $4,274 $3,911 $3,818 $3,830
EBIT $374 $279 $173 $3 $86
EBIT% 7.34% 6.52% 4.41% 0.07% 2.23%
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Defense: optical systems and equipment for military purposes, but also unmanned aerial vehicles.

Defense 2012 2011 2010 2009 2008
Revenue $1,815 $1,744 $1,711 $1,464 $1,409
EBIT $112 $70 $76 $12 $55
EBIT% 5.24% 4.08% 5.28% 1.00% 5.76%
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With regard to profitability Defense is the problem child of Safran. However it is a solid and steady source of revenue because France's Armed Forces is a major and reliable client.

Security: specializes in identification, secure documents and detection.

Security 2012 2011 2010 2009 2008
Revenue $2,133 $1,724 $1,437 $1,248 $959
EBIT $166 $160 $171 $119 $248
EBIT% 7.76% 9.29% 11.91% 9.51% 25.90%
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This division is the odd man out. Considering the decreasing profitability divesting it would strengthen Safran.

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FUTURE

To compare Safran's engine performance it is compared with Rolls-Royce , whose propulsion business is covered in this article and MTU Aero Engines (OTCPK:MTUAY) (OTC:MTUAF) from Germany.

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Safran's Aerospace Propulsion is performing very well compared to the other two. Unfortunately the other activities of Safran are more problematic.

The propulsion business is by far the better commercial performer of the product line. As mentioned earlier, although the other activities are less profitable, the contracts and orders received from the French government (armed forces and other government agencies) is a stable and reliable source of income.

Safran is on the right track, but especially the foreign exchange rates have a major impact on its performance. Safran has similar issues with exchange rates as Rolls-Royce.

INVESTING

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Safran is an interesting company. They improved their results, but will have to do better to justify the current price.

At a PE of 31 the Safran stock is not cheap. However if the results for 2013 are better or the final results correspond with the outlook for 2013, the PE will be about 20.

On February 20 the results for 2013 will be reported and If the results match the outlook and the stock is somewhat lower Safran is worth considering. The dividend is good and they have a few proper cash cows with the joint GE/Safrane engines, the French government revenue and the space propulsion contracts for Airbus Space.

Footnotes

1. Financial Data Sources

All financial data used is published by Safran Group. Remarks on the (financial) data used in the calculations:

  • Exchange rate used EUR/USD 1.38. All publications are in Euro.
  • Stock price USD 73.98 / EUR 53.61

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.