Since Dassault does not need to raise money — on the contrary, it has actively returned capital to its shareholders via mammoth share buybacks — and will never be an acquisition target, it is difficult to see what would boost its stock market valuation, apart perhaps a substantial dividend increase. This lack of obvious catalyst has also kept smaller funds at bay.

The situation, however, comes across as textbook value investing. At €87 per share, minus the €3bn in excess cash and 25% stake in defense group Thales, valued roughly €4bn at current market prices — itself at rock-bottom levels — Dassault's market capitalization assigns zero value to its core aviation business. Such peculiarity can only command attention, especially in the wake of the mega-contract signed a few days ago with the UAE.

Entire chapters could be devoted to the massive moat surrounding Dassault, a world leader in civil and military aviation with its acclaimed Falcon and Rafale franchises, among others. The holder of a unique, sovereign, highly strategic and non-reproducible expertise, it enjoys the unwavering support of the French State through both its commercial diplomacy and guaranteed volumes of orders.

After a troubled start on export markets, Rafales are now selling like hot cakes with big wins in the UAE, Egypt, India and Greece. Customers were apparently waiting for operational engagements — like those performed in Afghanistan, Libya and Syria — to take out their checkbooks. In terms of capabilities and value for money, the Rafale handily beats its two European rivals, the Typhoon and the Gripen.

Though none of this is secret, Dassault's valuation stalls despite a compelling history of returns and profitability, plus a full backlog that should remain as such for at least two decades. It is rare to find a profitable, extraordinary business protected by a such a massive competitive advantage and yet valued for zero. So what gives for this head-scratcher?

One can only guess, but there are different possibilities. To begin with, excess cash may not be completely available, since it could find itself gobbled up by costly R&D programs. In a like manner, despite its public listing, the stake in Thales is not entirely liquid either, as it is too sensitive to be disposed of, even partially. Finally, the defense sector is being filtered out by the ESG creed imposed on institutional investors.

That's for the flip side. Because finance-wise, Dassault Aviation has grown annual revenue from €4bn to €6bn over the last decade, with net margins oscillating around the 10% threshold and satisfactory rates of return on capital employed along the cycle. The fortress balance sheet is another source of comfort, with current assets covering all liabilities multiple times just by themselves.

Seen from another perspective than the sum-of-the-parts assessment laid out above, Dassault Aviation has generated an aggregate of €4bn in profits over the last decade, of which €3bn were returned to shareholders. This earning power is expected to grow meaningfully over the next years and should be considered against the current entreprise value of €4.5bn, including the stake in Thales.

Led by superb CEO Eric Trappier, management carried out massive share buybacks between 2014 and 2016, shrinking the float even further, and reducing the number of shares outstanding by a fifth. This very intelligent decision, at least on paper, has yet to produce the desired effect on share price. But that should prove only a matter of time.

The Rafale platform is now mature, with still decades of operational relevance ahead of itself. As for sales of Falcons, they should pick up as soon as fears about Covid dissipate. As a result, via Standard and other family-controlled investment vehicles, we have accumulated a sizeable amount of shares as they lingered below €90.