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Textron Inc. (TXT), TransDigm Group Incorporated (TDG), Triumph Group Inc (TGI): 1 Aerospace Company to Buy, 2 to Hold

Textron Inc.Earnings season is on a go and the market has established different expectations for different companies. Discussions on earnings might sound short-term and myopic to long-term investors. However, the fact is that conference calls always present a long-term strategy of the company. Management’s guidance reflects outlooks which eventually help to build long-term investment theses.

It has been some time since I began covering aerospace companies. Before I discuss the outlook for a couple of them, it is important to understand the sub-segments in this industry. Aerospace has four segments: Aerospace original equipment, or OE, aerospace aftermarket, business jets manufacturers and defense. Some are pure-plays while others have varied exposure in more than one segment.

Earnings preview and outlook

Textron Inc. (NYSE:TXT) is expected to report EPS of $0.39, according to consensus estimates. The manufacturer of business jets has for long excited investors who believe a strong recovery in business jets is likely. Though there is no doubt that the recovery will happen one day, no one is sure about the timing of the recovery.

For the quarter, the following estimates have been made regarding the revenue of different segments:

Cessna: Cessna, a wholly owned subsidiary of Textron Inc. (NYSE:TXT), is one of the leading designers and manufactures of business jets. The Street expects an organic revenue decline of 20% for this segment; An EBIT margin of -6.1% is expected (down from -4.6%). Some 28 Cessna unit deliveries are assumed in 2Q (down from 49 in the year ago period).

Bell (responsible for making military helicopters): organic revenue growth of 2%; EBIT margin of 14.2% (down 20 bp);

Systems (innovative solution provider for defense companies): organic revenue growth of 12%; EBIT margin of 9.0% (down 130 bp);

Industrial (aerospace supplies like turbochargers): organic revenue growth of 2%; EBIT margin of 8.0% (down 10 bp);

As far as the overall outlook is concerned, Textron Inc. (NYSE:TXT) is expected to make no changes to its 2013 guidance following the reduction it made last quarter attributable to a reduction in Cessna production. Also, the Street expects little change in tone from management on the prospects of a near-term pickup in business jet demand.

The following items will be of key interest to investors:

Business jet new-order demand

Commercial helicopter demand

V-22 international sales effort (V-22 is a military helicopter which has suffered from the sequester and the company is seeking ways to promote it on an international scale.)

Sequestration impact on Systems

Segment operating margin improvement potential

    Another “T” of the aerospace industry

    In 2012, TransDigm Group Incorporated (NYSE:TDG) was one of the best performing stocks in the Aerospace world (+43% vs. S&P 500 +13%), landing it in the top-10 companies in terms of share price performance for the seventh straight year. TransDigm Group Incorporated (NYSE:TDG) is expected to deliver a steady progression of “beat and raise” quarters as we move through 2013 and view current guidance as relatively conservative given easing aftermarket compares.

    As far as the outlook is concerned, TransDigm Group Incorporated (NYSE:TDG) is expected to raise its FY 2013 EPS guidance given: (1.) the current range is conservative with regard to its operating margin assumption; (2.) the company recently closed on Arkwin (a manufacturer of aerospace hydraulic and fuel-system components); and (3.) there is upside risk to the aerospace OE and aftermarket growth assumptions.

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