Lone Pine Capital filed a 13G with the SEC this week to report that it had acquired about 6 million shares of BE Aerospace Inc (NASDAQ:BEAV), giving the fund ownership of 5.7% of the company’s shares outstanding. BE Aerospace is a $4 billion market cap company which manufactures products for jet interiors- seat frames, oxygen storage and delivery systems, and even lavatory systems. The company also provides premium furnishings for business aircraft. At the end of June Lone Pine, managed by billionaire Tiger Cub Stephen Mandel and currently counting about $17 billion in assets under management, had reported a position of 4.5 million shares. Therefore, the fund added 1.5 million shares in about a month and half to bring it to 6 million by mid-August. Lone Pine had initiated its position in BE Aerospace earlier in 2012 (see more of Lone Pine's stock picks) .
At the end of the second quarter other hedge funds were generally reducing their positions in the company. Columbus Circle Investors had decreased its position slightly to 1.7 million shares, and fellow billionaire Ken Griffin’s Citadel Investment Group cut its take 23% to about 900,000 shares. Another large hedge fund holder of the stock, Wayne Cooperman’s Cobalt Capital Management, held its stake constant at about 940,000 shares (find more stocks in Cobalt Capital Management's portfolio).
BE Aerospace’s 10-Q for the second quarter of 2012 showed that the company had increased its revenue a remarkable 26% compared to the same period in 2011, and that net income had risen about 30% as it had been able to keep costs from outstripping revenue growth. Over the first half of the year, BE Aerospace revenue grew 25% and its earnings were up 33%. So the company’s growth appears to have been sustained over this period- both the first and second quarters well ahead of 2011. Growth in revenue and operating income occurred in all three of the company’s business segments: commercial aircraft, consumables management, and business jets. Revenue did only increase by 3% in the second quarter compared to the first quarter, however, suggesting that growth may be slowing.
The sell-side expects some slowdown in growth, but not much. At the moment BE Aerospace trades at 15 times trailing earnings, which given its recent growth rate would seem to make the stock quite reasonably priced. Analyst projections make it look very cheap: the forward P/E is 12 and going out over a longer time frame the five-year PEG ratio is 0.6. Perhaps the company’s earnings will not be quite as good as the Street expects, but given that it is trading at such a low multiple already we think that even moderate growth should easily justify the stock price. Concerns that the company is too exposed to the broader economy aren’t quite warranted either with a beta of 1.5: high, but not as high as an air travel-related company could be.
We would compare BE Aerospace to a number of other companies which produce aircraft components: Curtiss-Wright (NYSE:CW), HEICO (NYSE:HEI), and Triumph Group (NYSE:TGI). Curtiss-Wright manufactures precision components such as valves and pumps while the other two companies provide engine components and other parts. Triumph and Curtiss-Wright trade at close to 10 times earnings on both a trailing and forward basis, reflecting low growth expectations from Wall Street analysts, while HEICO is priced higher at a trailing P/E of 23 and a forward P/E of 19. Considering that more aircraft orders should mean more business for these companies as well as for BE Aerospace we’re not sure BE’s growth is going to be substantially higher, particularly as many of its products seem to be lower-tech than these other business’s offerings. We would also consider Embraer (NYSE:ERJ), a manufacturer of commercial and executive aircraft, as a peer. Embraer trades at 9 times forward earnings and a low five-year PEG ratio of 0.7. It grew its revenue, but lost ground on earnings, in its last quarter compared to the same period in 2011. It seems to have a growth trajectory more in line with BE Aerospace, and in this case we think we would pick the component manufacturer over the aircraft provider.