Description

Business description:

Goodrich is one of the largest worldwide suppliers of components, systems and services to the commercial and general aviation airplane markets.  Additionally, Goodrich is also a leading supplier of systems and products to the global defense and space markets.

Investment thesis:

• Over indexed to A320 and 737NG aircraft drives above industry revenue, EBIT and EPS growth over the next cycle.  Limited exposure to older aircraft that will likely be retired.
  
• Aftermarket represents roughly 45% of total sales providing significant operating leverage opportunity as global flight hours increase through 2010 into 2011.  Management conservatively expects slight capacity recovery, in the range of 1 –3% ASM growth, in 2010.  2010 margin guidance is conservative give the above mentioned 1-3% ASM growth providing a meaningful EPS cushion.
• Deferred maintenance by airlines and increased aircraft utilization (driver of aftermarket growth) has stabilized and should improve meaningfully in 2010 not captured in street #s.
  
• Pension accounting temporarily/artificially depresses EBIT margins in 2010 providing additional EPS cushion.

Longer-term upsides:

• Boeing 787 production rates ramp to a normalized level.
• Airbus 350 XWB enters into service the next 5 years.

Estimates and 2010 guidance:

• Revenue - $7.0bn, +5% yr/yr
• EPS - $4.15-$4.40

Key notes about guidance:

• Goodrich mgmt has assumed Boeing reduces the 737 production rate by roughly 10% (31/month to 27/month) during the second half of 2010.  With each passing day, it is becoming increasingly evident that a Boeing production cut is unlikely.  Boeing typically has to notify its suppliers 9 months in advance about a potential rate cut.  Our channel checks into the supplier community suggest Boeing has yet to communicate a cut.  As such, Goodrich's revenue guidance of 8-10% OE revenue growth should be conservative.
• Pension expense - 2010 headwind = $0.51 vs. 2009.  Mgmt is assuming a 5.6% discount rate in 2010, down 90bps yr/yr.  Since mgmt provided guidance in November, the yield curve has steepened.  Each 25bps change in the discount = $0.07/share.  If rates continue to move higher, Goodrich could easily pick up $0.07-$0.21 additional upside to guidance given pension smoothing policies.
  

Variant view:

• Our analysis of aftermarket trends and OE production rates Goodrich drive a base case/ trough EPS for 2010 = $4.60 growing to $5.50 in 2011.
• Downside trough multiple of 13x on $4.60 = $60
• Upside multiple 16x-18x $5.50 = $88-$99 in 12 months, yields 33%-50% upside.  

Catalyst

2010 Estimates too low

2011 EPS growth ramps for the first time in 3 years