Friday, February 4, 2011

BE Aerospace Flying High


Commercial aerospace stock BE Aerospace gave results today and were initially marked down, only to come back stronger in the day. The stock is interesting to research and report on, because it is one of the very few stocks in the sector with a focus on commercial aerospace. Therefore, you can avoid the vagaries of the effects of austerity measures on defence spending.

BE Aerospace is the world's leading supplier of aircraft cabins and interiors, with the main rival being Zodiac Aerospace of France.  It is also the global number one distributor of aerospace fasteners and consumables. In short, the more passenger air miles that are flown, the more wear and tear, and ultimately the more airlines need to replace equipment. With fasteners, it is ongoing. However, with things like cabin interiors the end demand is subject to upgrade cycles and new purchases.

Turning to the results.

BE Aerospace Q4 and Full Year Results

Results
  • Q4 revs of $541.9m vs. $526.4m estimates
  • Q4 adj diluted EPS of 47c vs. 40c estimates
Guidance
  • Full year revs of $2.4bn vs. $2.4bn estimates
  • Full year diluted EPS of $1.95 vs. $1.97bn
The book to bill ratio is now 1.1 and quoting from the results statement
'Currently, a number of factors that significantly influence our business are positive. The global economy, a key factor in driving global passenger traffic, continues to recover. As a result, the global airlines are experiencing strong growth in revenues, profitability and liquidity. Growing passenger traffic is driving smart capacity increases and higher aircraft utilization. In addition, due to record wide-body backlogs at the major OEM's, wide-body aircraft deliveries are expected to grow at an approximately 74 percent higher average rate as compared to 2010 deliveries each year from 2011 to 2014 and to continue to catalyze retrofit activity'
so the company has good earnings momentum from wide body aircraft growth, increasing passenger traffic and growth in new build.


A Two Speed Aerospace Market

As with much of the global economy, the growth is coming from emerging markets and, in particular, India and the Far East. The need for growth in the provision of inter city air traffic in these countries goes on unabated. BE Aerospace is well placed in the Far East, having announced that the company won $200m of orders from China in 2010. Wide body aircraft sales are growing with the increasing trend towards major hub-to-hub air traffic. Another area of growth comes from the budget airlines, who have supported new aircraft orders in Europe over the last few years.

However, what will ultimately guide the stock price is global passenger growth...

%2001200220032004200520062007200820092010E2011E
OECD growth1.21.723.22.83.12.70.3-3.42.82.3
Passenger growth-2.712.314.9756.41.5-2.18.95.2
Source: IATA, OECD
...and this seems to be capable of generating growth in excess of global GDP. The industry was hit hard after 9/11 but has recovered strongly.


BE Aerospace Earnings
Turning to how industry growth blends into BE Aerospace earnings. In terms of revenues...

 
(m)20062007200820092010
Revenue11281677211019371984
Gross  Profit425.9570.1723.5669.2720.5
margin37.8%34.0%34.3%34.5%36.3%
Source: BE Aerospace, Earnings View

...and looking at the last five years for BE Aerospace...

(m)20062007200820092010
Pre-Tax Profit90215.5302204.6211.6
WC Movement-105-241.9-234.2-18212.4
Op Cash Flow4122115.582.3295.8
OCF/Pre-Tax45.6%10.2%38.2%40.2%139.8%
Depreciation293540.749.552.4
Capex24.132.131.728.468.9
capex/dep83.1%91.7%77.9%57.4%131.5%
FCF16.9-10.183.853.9226.9
FCF/EV0.4%-0.2%1.8%1.1%4.8%
Source: BE Aerospace, Earnings View
...the pattern is clear. BE Aerospace always adverse working capital movements when in the growth phase. This is completely natural but, it does mean that an investor will have to assess the cyclical nature of BE Aerospace growth in his calculations.


BE Aerospace a Stock to Buy?

Ultimately taking a view on BE Aerospace as a stock to buy will depend upon taking a positive outlook for passenger growth. Furthermore, that growth is skewed towards wide body aircraft and emerging market air travel. These are both positive drivers and BE Aerospace appears set for good long term growth. Indeed, 2012  forecasts are for revenues of $2.4bn and EPS of $1.95 and free cash flow is forecasts at $196m.

 If we accept the 2012 free cash flow forecast it will mean that BE Aerospace has generated $567m in free cash flow over the last six years. The current share price is $37.85 giving a market cap of $3.87bn and an enterprise value of $4.63bn. Frankly, I think this rating is fairly priced for the longer term risk. Whilst growth looks assured for 2011, there are still concerns over asset class bubbles in China and BE Aerospace-although attractive- is not priced cheaply enough for this risk.



Source:

IATA Outlook