1. B/E Aerospace (BEAV $43.30) – Buy January5, 2016
Market cap $4.53 Bil
Dividendyield1.75%
Analystratings: Buys12, Holds 4, Sells 0
Short interest: 3%
BEAV is the leadingmanufacturerof aircraftcabininteriorproducts(seating,lavatory,galley,lighting,
oxygen,foodandbeverage prep,andmore). Theyhave strongpositions oncommercial aircraftfrom
BoeingandAirbus (approx.75%of revenues),aswell asbusinessjets (approx.25% of revenues). OEM
accounts for~60% of revs,while aftermarket~40% of revs.
BEAV is well entrenchedinthe ongoingcommercial aircraftup-cyclefororders,production,anddeliveries.
In addition,BEAV continuestotake marketshare. Afterhavingastrong few years,2015 proveda bit
tougherwithweakDefensesales(4%of 2014 revs),veryweaksalestoRussia(4% of 2014 revs),and
softeningordersinthe businessjetmarket,includingsome delaysonsome new aircraft. BEAV stockis
downfroma highof $64 to current$43, due to the above,aswell asBEAV’sinitial FY’16guidance of
revenuesuponly1-2%,witheps+5% (weakerthanexpected). So2016 isgoingto be relativelyflat,and
investorshave pushedBEAV aside. The FY’17 outlookismuchbetter withrevenuesguided+7.5%,andeps
+low-midteens,simplydue to the timingof bigcommercial ordersfromFY’13 and FY’14 that will be
recognizedinFY’17 and’18 when the aircraft deliveryschedulescome throughwithalot of BEAV content.
BEAV guidance includes onlythe BEAV contentonthe aircraftthat are currentlyscheduledfordelivery in
those respective years withspecificairline customers,forwhichBEAV hassecuredanorder. In that regard,
there is concern on the Boeing777; that Boeingmayneedtocut productionon the 777 inFY’17, and that is
alsohurtingBEAV stock. However,BEAV managementhasstatedthatFY’17 shouldnotbe impactedfroma
cut in production,butrather,onlyif some 777 deliveriesare deferredorcancelled. If any new 777 orders
come in fordeliveryin 2017, thenthat wouldbe upside toBEAV’sguidance. Currently,Boeinghasfilled
onlyhalf of the 777 slotsin2017.
Aircraftproduction isrampingup,as well asnew aircraftbeingdelivered,currently andinthe nearfuture,
withmore BEAV content: A350, A320/A320neo, B787, B737/B737max.
Othernotes: Main seatingcompetitor,ZodiacAerospace,havingproduction anddelivery problemswhich
will probablyleadtosome more marketshare gainsforBEAV (alreadysoundslike AmericanAirlinesisgoing
to be movingsome businessawayfromZodiactowardBEAV). BEAV isundergoingoperational
improvementstocutcosts and continue toimprove operatingmarginsfromthe current18%+ level.
Aftermarketbusiness(40%of revenues) shouldshow strengthafterweakerthanexpected2015, as more of
the olderplanesinservice needupgrades/repairs,airlineprofitabilityisextremelystrong,andthe recent
growthin newplanesinservice thatwill startto come out of warranty. All of these elements bodewellfor
BEAV.
I thinkit’sonlya matterof a fewmonthsbefore BEAV stockstartsto reallyappreciate. Investors feel they
can be patientbefore buying,as2016 will be a flatyearfor business. With2017 havingthe big
acceleration, Iambettingthatinvestorsprobablyhave BEAV onthe radar for mid-year2016, whichwould
put itonlysix monthsaway from the growthyear,whenone startsto focus on2017 eps. Right now,at the
endof the year,there’ssome tax-lossselling,andinvestors are justwaiting.
2. Balance sheet: Cash$164mil; Total debt$2.03 Bil;Netdebt/EBITDA 3.1x (witha longtermleverage ratio
target of 2.5x).
One note to pointoutis that BEAV’s$2.03 Bil in longtermdebtisfloatingrate at Libor + 325bps (currently
paying4.00%), sotheyare subjectto interestrate increases. Forevery50bpsincrease inrates,BEAV’seps
will be hurtby ~9-10c (or ~3%) on FY’16 eps. Intermsof stockprice,a 13x multiple onthat10c isonly
$1.30, so it’snot devastatingtothe stockprice. With that said, managementdoeskeepaneye onits
capital structure,inregardsto swappingintofixedrate debt.
Valuationand Bottom Line: WithFY’16 revsguided+1-2% andepsguidedto$3.15-3.20 (+5%),BEAV
tradesat a verylowmultipleof 13.6x P/E,pricinginquite a goodamountof risk,inmy opinion. Withthe
accelerationinFY’17 expectedtocome…revs+7.5% andeps +13-15% to approx.$3.58-3.65, BEAV istrading
at a P/Eof 12.0x. Recently,atitshighof $64 inFeb2015, BEAV was trading21x FY’15’s epsof $3.00. One
yearfrom now,if BEAV continuestoexecute andmaintainsguidance,Icouldsee BEAV tradingat18x FY’17
epsof ~$3.60, or $65 (+50% fromcurrentlevels). Buynow.
Risksand concerns:
*Aircraftnewordermarketslows,withdeferralsandcancellations of existingorders
*General global economicslowdown
*Interestrates rise quickly,affectingBEAV’sfloatingrate debt,andincreasingtheirinterestexpense
Doug Sokolower
917-494-2030
dsokolower@yahoo.com