2013 | 2014 | ||||||
Price: | 62.00 | EPS | $2.83 | $3.58 | |||
Shares Out. (in M): | 104 | P/E | 21.9x | 17.3x | |||
Market Cap (in $M): | 6,448 | P/FCF | 28.3x | 19.6x | |||
Net Debt (in $M): | 1,431 | EBIT | 540 | 650 | |||
TEV (in $M): | 7,879 | TEV/EBIT | 12.4x | 10.7x |
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I. RECOMMENDATION
A. SUMMARY
BE Aerospace (BEAV) is a high quality aerospace parts supplier / distributor that is extremely well positioned for the current multi-year commercial aircraft OE cycle. Overall, BEAV is modestly more geared to the commercial aircraft new build (~60% of total sales), allowing it to benefit from strong cyclical trends as Boeing/Airbus wide-body build rates will increase ~50% by 2016; depending on aircraft type, BEAV has 5x-10x the content per widebody as it does per narrowbody. Given this dynamic, I believe that eps can grow at a ~20% cagr through 2015. Despite the stock’s strong recent performance, I believe that BEAV will approach ~$82/share, about 32% above the last sale, within the next 12-18 months |
B. RISK VS. REWARD
REWARD: A 12-18 month target of $82/share, or about 30-35% upside (12x ’14 EV / EBIT), which is in-line with its 10-year avg fwd EV/EBIT mult).
BEAV is essentially a commercial aerospace pure-play with more than 90% of sales derived from aerospace end markets (and <10% from defense). Moreover, given that BEAV is hugely levered to widebody aircraft demand, the company is extremely well positioned for this cycle and will realize an eps growth rate over the next several years that is superior to virtually all of its comps. BEAV is the clear market leader in both of its main lines of business – cabin and interior products for commercial aircraft and business jets, and aerospace parts/fastener distribution – and enjoys significant barriers to entry.
I am bullish on the prospects of the commercial aerospace industry, and BEAV in particular, for several reasons: - We’re at a point in time where aircraft demand is being pushed by several factors:
- Aircraft financing remains readily available, and by large, lenders view commercial aircraft as one of the more secure assets to lend against. - Huge backlog provides earnings visibility – BA and Airbus have a combined backlog of >9,000 aircraft, providing >7 years of output at 2012 levels. - I believe BEAV will be a prime beneficiary of key trends during this cycle:
- Aerospace aftermarket demand is healthy and I believe pricing remains robust as well.
- A key driver of aftermarket demand, available seat miles (ASM’s), are an incredibly steady metric and are expected to increase ~5.4% in 2013. Only 3 times over the last 30 years have ASM’s turned negative – ’91 (Gulf War), ’01 (911), ’08 (Financial Crisis) – and when ASM’s turn negative they have only done so to the tune of 1%-2%.
RISK: The main risks to BEAV include: - Global recession suppresses air passenger traffic, thus decreasing demand for aftermarket parts. - High and rising oil prices – would diminish airline profitability, and over time, BEAV has shown some correlation to oil prices. Diminished airline profitability could mean a decrease in discretionary spend, which would be a clear negative for BEAV’s cabin retrofit business. - Credit markets collapse – obviously not a BEAV-specific risk, though given the huge amount of financing that is used to purchase aircraft, the industry needs a well-functioning credit market to thrive. - Insider selling – has been a knock on management and the stock for some time. That said, management doesn’t seem to discriminate when they are selling, as they were frequent sellers in 2009 when the stock was at much lower levels. |
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II. COMPANY SUMMARY
A. BUSINESS
B/E Aerospace is the worldwide leading manufacturer of aircraft passenger cabin interior products for the commercial and business jet aircraft markets. BEAV is also the leading global distributor of aerospace fasteners, and continues to focus on growing this business through strategic M&A deals. BEAV has leading worldwide market shares in all of its major product lines and serves virtually all of the world's airlines, aircraft manufacturers and leasing companies through its direct global sales and customer support organizations. BEAV is led by CEO Amin Khoury, who founded the company in 1987. |
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B. SEGMENT OVERVIEW
BEAV is essentially two distinct businesses broken up into three segments (and both businesses are clear market leaders): - The first business (and segment) is Consumables Management, a distributor of fasteners and other consumables to the aerospace industry. This is a solid cash generating business that is very much tied to the commercial aerospace aftermarket. - The second business is geared to the manufacture of cabin and interior products, namely premium seats used in first class and business class seating. This business is broken into two segments based on customer-base – Commercial Aircraft and Business Jet. |
C. CAPITAL INTENSITY
BEAV is not a highly capital intensive business. Maintenance capex runs about $60mm per annum, which is more or less in line with depreciation. BEAV is still spending modestly on growing their business, and 2013 capex should run ~$130mm. That said, BEAV has spent considerably on building out capacity in front of this aerospace cycle, and the vast majority of growth capex is behind the company. |
D. BARRIERS TO ENTRY
The barriers to entry for BEAV’s business are: - Technological expertise – when it comes to cabin and interior products, BEAV is the clear market leader and innovator. - Federal Aviation Administration – FAA approval is needed for all aerospace products. This approval process is time consuming and costly. - Large Installed Base – as of 12/31/12 BEAV has an estimated installed base of $9.5bln, providing a source for recurring aftermarket revenue streams. |
III. VARIANT PERCEPTION
There are several components to my variant perception: - Near term indicators (along with easier H2’13 comps) point to continued growth in global flight miles and thus a positive indicator for BEAV’s aftermarket business; over time, flight miles have demonstrated that they will grow in just about any environment outside of a major global crisis. - Tight load factors indicate that airlines are managing supply in a very disciplined manner – 2013 should remain a very good year for airline profitability assuming supply remains tight. - Organic growth will be very much driven by the new build cycle – while aftermarket demand remains important to BEAV, growth over the next several years will clearly be driven by the OE cycle. Even retrofit sales, which are accounted for as aftermarket, are driven by the OE cycle. - The Street is modeling operating margins fairly conservatively over the next several years in my opinion – this will most likely be a reason for upside surprises. - Increased demand for new aircraft is more secular in nature than cyclical – going forward the world needs more aircraft capacity, and more specifically, aircraft that are fuel efficient. |
VI. SUMMARY FINANCIALS
(Forecast assumes excess free cash sits on b/s)
12/31/10 |
12/31/11 |
12/31/12 |
12/31/13 |
12/31/14 |
12/31/15 |
||
Revenue |
1,984 |
2,500 |
3,085 |
3,479 |
3,862 |
4,273 |
|
Change |
2.4% |
26.0% |
23.4% |
12.8% |
11.0% |
10.7% |
|
EBITDA |
368 |
490 |
615 |
737 |
849 |
967 |
|
Margin |
18.5% |
19.6% |
19.9% |
21.2% |
22.0% |
22.6% |
|
EBIT |
325 |
428 |
540 |
650 |
752 |
862 |
|
Margin |
16.4% |
17.1% |
17.5% |
18.7% |
19.5% |
20.2% |
|
EPS |
$1.61 |
$2.24 |
$2.83 |
$3.58 |
$4.34 |
$5.12 |
|
Change |
1.9% |
39.1% |
26.3% |
26.4% |
21.3% |
18.1% |
|
Free Cash Flow |
200 |
214 |
228 |
329 |
442 |
546 |
|
(multiples on current TEV)
|
|||||||
EV / EBITDA |
10.8x |
9.4x |
8.2x |
||||
EV / (EBITDA - Maint CapEx) |
11.7x |
10.0x |
8.7x |
||||
EV / EBIT |
12.3x |
10.6x |
9.2x |
||||
P / E |
17.3x |
14.3x |
12.1x |
||||
FCF Yield |
5.2% |
6.9% |
8.6% |
||||
EV / EBIT Target |
|||||||
Multiple |
12.0x |
12.0x |
12.0x |
- 10 year avg. EV/EBIT mult is 12x |
|||
Target Price |
$65.60 |
$81.83 |
$100.05 |
||||
Upside (Downside) |
5.8% |
32.0% |
61.4% |
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