Overview:
BE Aerospace (BEAV) is an excellent company that is trading at a depressed valuation due to global macro fears. The
stock is discounting the current lull in commercial OE deliveries and weaker demand in the business jet market, but
it is not yet discounting the large increase in commercial OE deliveries that will occur in the next couple of years.
Airlines are profitable and global air traffic continues to grow. Large industry and company backlogs should be
relatively safe, barring a major recession or terrorist attack. We see the stock trading at over a 9% free cash flow
yield on 2018 and think this is an attractive opportunity to own a very high-quality business.
Company Overview:
BEAV is the market leader in highly consolidated industry of providing cabin interior products for commercial and
business jets with 50% market share and growing. The company manufactures such products as seats (all classes),
food and beverage prep/storage equipment, modular lavatory/galley systems, oxygen storage/distribution/delivery
systems, protective breathing equipment, and lighting products.
The company reports two segments: Commercial Aerospace (~80% of rev) and Business Jets (~20% of revenue). For
some reason, the company also includes commercial Super First Class seats in the Business Jet segment (think first
class cabins on Emirates Air) and this has been a big driver. ~45% of the Business Jet segment revenue (~10% of
company revenue) is derived from actual OE biz jets where demand has been, and continues to be, weak.
~40% of revenue (with higher contribution margins) is derived from the aftermarket. A portion of aftermarket
revenue is spares (i.e. broken seats) and from regulatory driven demand(changes in standards, etc.). Another
portion is refurbishment (cabin overhauls), which is more discretionary in nature and is driven by modernizing older
planes and b the desire to match interiors of newer planes in the fleet. Larger installed base of planes should drive
acceleration of aftermarket demand.
In terms of customers, the vast majority of sales are made to plane owners, not OEM’s (i.e. American Airlines will
order seating, food prep equip, etc. from BEAV and it will be installed at OEM factory right before delivery). ~80%
of total revenue is derived directly from airlines, leasing co’s and MRO (Maintenance Repair Operations) providers.
The main exception to this is the SFE program (see below).
The Seller Furnished Equipment (SFE) program is starting to provide additional growth to the company. The
company has been capitalizing much of the program costs and is now starting to really ramp up. Select programs
include: exclusive manufacturer of modular Lavatories for 737 (NG and MAX), lighting systems on 737, oxygen
systems on 787 and 747, and galley systems and oxygen system on A350 XWB.
Industry:
The industry has very high barriers to entry including: regulatory (i.e. FAA standards and licensing requirements),
large installed base, broad product line/scale, patents. In terms of competition there are a number of competitors
in each individual categorybut only a couple that can provide products across the board (really only BEAV and
Zodiac). The industry has been very rational over time in terms of not aggressively using price in order to gain
volumes in lower periods of demand.
Investment Considerations/Drivers
Obviously the main driver for the company is commercial OE deliveries. However, wide-body planes require up to
