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Saab AB (OTC:SAABF) is a Swedish aerospace manufacturer since the 1930s and used to be an important independent neutral designer and builder of military aircraft during the Cold War. Today the days of independent development are slowly disappearing in the past and Saab is finding a new path into the future with a surprising twist.

This article is part of the series on the aerospace industry.

Saab AB is mainly working in the defense sector just as Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) who were compared in this article and Raytheon (NYSE:RTN) which is a steady earner.

European competitor BAE Systems (OTCPK:BAESY) (OTCPK:BAESF) used to be a major shareholder, but have sold their participation in Saab during their reorganization.

FUNDAMENTALS

All financial data used is from financial reports published by Saab AB. The exchange rate used for SEK/USD is 0.15 at a stock price of SEK 179.80 / USD 26.97

Corporate20122011201020092008
Revenue$3,602$3,525$3,665$3,697$3,569
Net income$231$333$68$105-$36
EBIT$305$441$146$206$25
EBIT%8.46%12.52%3.99%5.57%0.70%
FCF$3$310$414$65$114
EPS$2.15$3.06$0.60$0.94-$0.35
Dividend$0.68$0.68$0.53$0.34$0.26
Dividend Yield2.50%
ROA5.19%6.97%1.55%2.30%-0.74%
ROCE12.11%16.83%6.14%9.05%1.26%
ROE10.92%16.96%3.97%6.54%-2.59%
Debt/Equity1.111.431.561.852.53
PE (Price/Earnings)12.55

Revenue is stable; but free cash flow and EBIT are changing frequently over the past few years, but they are slowly returning to a more stable normal.

Its dividend has risen over the years and the order book is also increasing. Investor AB (OTC:IVSXF) - of the Wallenberg family - is the largest shareholder with 30% of the shares, which provides stability.

The Swedish government is an important client and Saab is a strategic industry for Sweden, which provides military independence to a certain point. This importance also provides stability to Saab.

FUTURE

The JAS39 Gripen is probably the last independent design Saab AB will produce. Military aircraft development and manufacturing is becoming so expensive and takes so long, that only a few very large companies or countries can do it. Development of the Gripen started in the 1980's when the Cold war was still present in the background and Sweden was neutral middle ground. It should not be written off though.

The Swedish Air Force has placed orders for the new Gripen NG which will generate revenue up to 2026. The Gripen NG is also selected by Switzerland, but this has to be confirmed with a referendum in May 2014.

But more importantly the Gripen was selected in December 2013 by Brazil as their new fighter aircraft in the F-X2 selection. The Gripen will be produced in Brazil as technology transfer and Brazilian involvement were the most important factors for the order. A naval version will probably be developed for Brazil's navy.

The Gripen is also much cheaper to operate than other fighter aircraft such as the future F-35, F-16, F-18 or Eurofighter Typhoon. This makes it an attractive candidate for countries with a limited budget.

Another card up Saab's sleeve is the participation in the unmanned combat aerial vehicle nEUROn project with Dassault Aviation (OTCPK:DASTY) (OTCPK:DASTF), of which almost 50% is owned by Airbus Group (OTCPK:EADSF) (OTCPK:EADSY). This UCAV will incorporate systems developed for the Gripen and Saab has an important stake in nEUROn.

Dassault Aviation and BAE Systems supplied the British and French governments with a proposal to jointly develop an UCAV. Saab participates in this through Dassault Aviation.

INVESTING

Saab AB is an interesting company to invest in:

  • Although the stock has risen after the Brazil announcement, at a PE of 12.5 it is still not expensive;
  • Saab has an attractive and increasing dividend of 2.50% now;
  • Stable (and more likely rising) revenue over the next decade.
Source: Saab AB: Swedish Phoenix Rising