B/E AEROSPACE INC BEAV
April 30, 2013 - 10:31pm EST by
Astor
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: 7,879 TEV/EBIT 12.4x 10.7x

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  • Aerospace Parts
  • Distributor
  • Rollup
 

Description

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:

  • Secular growth in air travel in the developing world necessitates increased capacity. Assuming demand for air travel increases 5% per annum (which is both in line with IATA forecasts as well as modestly below the avg. rate of the last 25 years) the industry would need 825 units each year for expansion.
  • Replacement demand – with a global fleet of ~16,500 commercial aircraft (excluding regional jets) and the general assumption that an aircraft lasts 30 years, the industry needs 550 units each year just for replacement.
  • Oil prices at elevated levels (>$80/bbl) provide airlines with ample incentive to buy next gen aircraft.  This is causing aircraft to be retired prematurely in some instances.

-             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:

  • Leverage to wide-body aircraft build – total wide-body deliveries by BA and Airbus will increase from 317 units in 2012 to 366 units in 2016 (+~50%).  BEAV has 5x-10x the content per wide-body vs. narrow-body, and will continue to benefit enormously as this trend plays out.
  • Airlines are making a great deal of their profits in premium class seating (1st class and business class), and we’re even seeing regional jets – which are non-traditional BEAV customers – retrofit their cabins with premium class seating.

-          Aerospace aftermarket demand is healthy and I believe pricing remains robust as well.

  • Airline profitability is expected to remain strong throughout 2013, as high industry load factors signify tight supply of seating.  The IATA recently revised its airline profitability forecast up, and now expects $10.6bln in ’13 (up a strong 43% from $7.6bln achieved in ’12).
  • Several reports corroborate low levels of consumables inventory at the MRO level.
  • As BEAV management has recently indicated, the current pricing environment remains robust.

-             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.

 

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.

 

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%

 
I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.

Catalyst

- strong H2'13 aftermarket growth
- M&A
- further cabin interior wins on 777
- recovery in business jet demand
    sort by   Expand   New

    Description

    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:

    • Secular growth in air travel in the developing world necessitates increased capacity. Assuming demand for air travel increases 5% per annum (which is both in line with IATA forecasts as well as modestly below the avg. rate of the last 25 years) the industry would need 825 units each year for expansion.
    • Replacement demand – with a global fleet of ~16,500 commercial aircraft (excluding regional jets) and the general assumption that an aircraft lasts 30 years, the industry needs 550 units each year just for replacement.
    • Oil prices at elevated levels (>$80/bbl) provide airlines with ample incentive to buy next gen aircraft.  This is causing aircraft to be retired prematurely in some instances.

    -             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:

    • Leverage to wide-body aircraft build – total wide-body deliveries by BA and Airbus will increase from 317 units in 2012 to 366 units in 2016 (+~50%).  BEAV has 5x-10x the content per wide-body vs. narrow-body, and will continue to benefit enormously as this trend plays out.
    • Airlines are making a great deal of their profits in premium class seating (1st class and business class), and we’re even seeing regional jets – which are non-traditional BEAV customers – retrofit their cabins with premium class seating.

    -          Aerospace aftermarket demand is healthy and I believe pricing remains robust as well.

    • Airline profitability is expected to remain strong throughout 2013, as high industry load factors signify tight supply of seating.  The IATA recently revised its airline profitability forecast up, and now expects $10.6bln in ’13 (up a strong 43% from $7.6bln achieved in ’12).
    • Several reports corroborate low levels of consumables inventory at the MRO level.
    • As BEAV management has recently indicated, the current pricing environment remains robust.

    -             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.

     

    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.

     

    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%

     
    I do not hold a position of employment, directorship, or consultancy with the issuer.
    Neither I nor others I advise hold a material investment in the issuer's securities.

    Catalyst

    - strong H2'13 aftermarket growth
    - M&A
    - further cabin interior wins on 777
    - recovery in business jet demand

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