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...

%	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010E	2011E
OECD growth	1.2	1.7	2	3.2	2.8	3.1	2.7	0.3	-3.4	2.8	2.3
Passenger growth	-2.7	1	2.3	14.9	7	5	6.4	1.5	-2.1	8.9	5.2

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)	2006	2007	2008	2009	2010
Revenue	1128	1677	2110	1937	1984
Gross  Profit	425.9	570.1	723.5	669.2	720.5
margin	37.8%	34.0%	34.3%	34.5%	36.3%

Source: BE Aerospace, Earnings View

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

(m)	2006	2007	2008	2009	2010
Pre-Tax Profit	90	215.5	302	204.6	211.6
WC Movement	-105	-241.9	-234.2	-182	12.4
Op Cash Flow	41	22	115.5	82.3	295.8
OCF/Pre-Tax	45.6%	10.2%	38.2%	40.2%	139.8%
Depreciation	29	35	40.7	49.5	52.4
Capex	24.1	32.1	31.7	28.4	68.9
capex/dep	83.1%	91.7%	77.9%	57.4%	131.5%
FCF	16.9	-10.1	83.8	53.9	226.9
FCF/EV	0.4%	-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

UPS Delivered Simple

With UPS, sometimes less is more. Analysts and investors spend an awful lot of time analysing the minutiae of every aspect of a company's performance, when quite often, the primary driver of the stock price is actually something quite prosaic.

I think this is the case with UPS. UPS delivers packages worldwide. More economic growth, more packages, it is as simple as that. Naturally, there are company specific issues but as an investor our job is to be able to define the key stock price drivers in a perspicacious way.

So what guides the UPS stock price?


UPS Revenue Growth and Global GDP

Simply put, UPS growth is dependent on the economy. I have carried out a linear regression analysis on UPS growth vs. OECD global growth. Here is the raw data for the last eight years

growth%	2003	2004	2005	2006	2007	2008	2009	2010	2011E	2012E
OECD	2.0	3.2	2.8	3.1	2.7	0.3	-3.4	2.8	2.3	2.8
UPS Rev	7.1	9.2	12.0	11.7	4.5	3.6	-12.0	9.4	8.0	9.0

Source: Earnings View, OECD

The UPS revenue figures have been adjusted for acquisitions. The last two years are estimates which are garnered from OECD forecasts and estimates from the analysis. For the record, the equation that came out was

UPS Rev=3.274*Global Growth+.153

The R^2 for this equation was 90% so it is quite accurate. Analysts are forecasting 7.6% and 7.1% revenue growth for 2011 and 2012 respectively. This suggests some 'surprise' upside, but investors would have to price in a risk premium for the chance of being wrong.

At the current price of $74 I would argue that UPS is fairly priced. The dividend is not great and their cash flow is not that much in excess of long bond yields. I see no reason to take on the extra risk for a return that is likely to match UPS' earnings growth.  However, if there is a dip and I'm confident about GDP growth than it might be worth another look.

Tupperware Still Looks Cheap Despite the Rise

Tupperware Driven by Emerging Markets

Emerging Markets play Tupperware gave great results and, the stock is up handsomely but I think they are still cheap. The company was first featured in an in depth article here

 I will refer to this article in making this update.

Initially, looking at the headline results

• Q4 Revenue of $655m vs. $643.8m estimates
• Q4 Adj diluted EPS of 138c vs. 128c estimates

Guidance

• Q1 Adj diluted EPS of 81-86c vs. 84c estimates
• Full Year Adj diluted EPS of 423-433c vs. 416c estimates

Tupperware Results Show a Two Speed Situation

The key points to note about these results are

• Emerging market growth is very strong
• Established markets growth is showing consolidated decline
• Beauty North America has been restructured successfully
• Beauty International showing strong growth
• Gross margins steady despite sales shifts
• Very strong cash flow generation

As noted in the previous article, the largest single segment is Europe which is demonstrating consolidated declines. For the quarter, Europe segmental profit was down to $57.9m from $62.7m. However, this story is somewhat mixed because South Africa and Turkey are both included in this region. They reported 31% and 39% local sales growth respectively.

The decline in established markets cannot be hidden

(In millions except per share data)
	13 Weeks Ended Dec 25, 2010						13 Weeks Ended Dec 26, 2009
	Reported		Adj's		Excl Adj's		Reported		Adj's		Excl Adj's
Segment profit
Europe	$    57.8		$   0.1		$     57.9		$    62.6		$    0.1		$     62.7
Asia Pacific	34.4		0.2		34.6		28.3		0.3		28.6
TW North America	13.9		-		13.9		13.5		-		13.5
Beauty North America	19.5		0.4		19.9		15.4		0.5		15.9
Beauty Other	14.6		0.3		14.9		7.5		0.4		7.9
	140.2		1.0		141.2		127.3		1.3		128.6

Asia reported stellar growth and is off setting weakness in Europe. Within Asia, India and Indonesia reported particularly strong growth.

Tupperware North America reported good sales growth and the business was restructured in Mexico, producing better marginal returns.

Similarly, Beauty North America has seen restructuring lead to strongly increased profitability, even though sales the quarter were only up 1% locally from last year. Beauty International reported sales up 16% in local currency and segmental profit up 95%

Tupperware Still a Stock to Buy?

I will reduce due to position weighting but I still think there is good growth in the stock price. Tupperware’s emerging markets business (56% of sales) went up by 15% in local currency, whilst established markets were down 2%. These numbers tell you most of what you need to know about this business. There is a structural shift happening in Tupperware’s revenues and profitability.

Whilst established markets are in decline, Tupperware has demonstrated that they have a relatively recession proof business model. This is particularly interesting for a hedged portfolio because Tupperware will outperform if a ‘double dip’ happens, however they still offer growth potential if the global economy continues to improve.

Moreover, they convert cash very well and have generated $246m in free cash flow for 2010. This puts them on a FCF/EV evaluation of 7.64% This is cheap for a business set to grow revenues at 6-8% and EPS at 18%

In addition, Tupperware is making all the right noises about increasing dividends in line with earnings growth and making share buybacks. There is more room to run here.

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