The Boeing Company (BA) & The Coming Aerospace Boom

Page 1 of 2

It has been predicted that over the next several years a boom will take place in commercial aerospace orders (Figure 1). These orders are cyclical, but lag the economy to some extent as seen in the graph below. For example, after the September 11th terrorist attacks and due to the 2000 recession, orders were curtailed for some time before beginning a rebound in 2005. Likewise, the 2008 financial crisis has caused a lagging curtailment of demand that seems to be on the verge of bottoming. As a result, it is expected that strong demand in aerospace companies is to be expected for the next several years and companies within this sector are likely to be strong investments.

Figure 1: The Coming Aerospace Boom – Airbus and The Boeing Company (NYSE:BA) Order Backlog

Astronics Corporation (NASDAQ:ATRO) is a manufacturer of specialized lighting and electronics equipment for commercial and military aircraft. The company reported several weak quarters last year as the price bottomed near $20 per share in November. Specifically, the company reported narrowing profit margins and profit of $0.39 and $0.33 in Q2 and Q3 2012 versus analyst expectations of $0.47 and $0.43, respectively. Profits rebounded somewhat to $0.37 in the fourth quarter, but given the uneven performance and lack of a clear growth trajectory the 40% rise in price since last year seems to be at least fairly discounting the company’s performance.

The Boeing Company (NYSE:BA)The Boeing Company (NYSE:BA) is the best-known name among the group with a strong history in commercial aviation. The company derives 60% of revenue from commercial airplanes and the remaining 40% from defense spending. Boeing has recently benefited from better than expected execution of the 787 Dreamliner as the Street had been overly discounting concerns over delays and cost overruns. The Boeing Company (NYSE:BA) is a great company, however, the current market price does not appear to be all that exciting. At 17.5 times Trailing Twelve Months earnings with little EPS growth over the past five-years The Boeing Company (NYSE:BA) is at best fully valued and it could be argued that the company is overvalued.

Lockheed Martin Corporation (NYSE:LMT) is a behemoth of aerospace, but derives the vast majority of its revenue from government defense spending (80% of last year’s revenues). Lockheed is not a good play on commercial aviation spending, however, compared to its peers it may be underpriced due to concerns over curtailment of government defense spending. Given the present escalation of tensions in Korea and unlikelihood of substantial action to cut defense spending, Martin Corporation (NYSE:LMT) is most likely a very attractive investment opportunity. A false bearish thesis is always bullish and it is anticipated that concern over cuts to defense spending are overblown at this time.

Precision Castparts Corp. (NYSE:PCP) is a manufacturer of jet and industrial gas turbine engine components. The aerospace market accounts for 62% of sales, with power generation comprising 21% and the remaining 17% coming from automotive and general industrial sales. The company boasts fantastic profit margins at a pretax margin of nearly 26%. The specialized parts that the company produces afford a strong moat. At the present time the company appears fully valued at 20.5 times trailing earnings, but it represents a strong buy on any available weakness.

Table 1: Comparables for Several Aerospace Firms

Triumph Group Inc (NYSE:TGI) is a manufacturer of aircraft components and structural assemblies with 65% of revenue coming from commercial aviation or private jets and most of the remaining revenue coming from military spending (32%). In 2010 Triumph acquired Vought Aircraft Industries from the Carlyle group for cash and stock. The acquisition has been accretive to margins and earnings for a price of $1.66 billion. Given that 55% of Triumph’s revenue comes from an acquisition that cost 46% of its present market capitalization, the acquisition seems to have been a wise move.  Add to that synergies between the companies, which have caused margins to expand considerably and in total the acquisition has been a tremendous boon for Triumph Group Inc (NYSE:TGI)shareholders. A fair amount of debt was issued for the acquisition, however, as a percentage of capitalization the debt stands at 34% or about 1.81 times last year’s EBITDA.

Given the strong growth Triumph Group Inc (NYSE:TGI) has achieved in the past several years, 11 times TTM earnings seems a low price to pay, corresponding to a PEG of 0.87. The chart below outlines these observations: notice how profit margins have moved higher due to the Vought acquisition in 2010 and that given the recent pullback the company now trades near the bottom of its EBITDA/EV valuation over the past fifteen years.

Figure 2: Triumph Performance and Valuation Since 1997

After the most recent earnings report, Triumph Group Inc (NYSE:TGI) has taken a tumble and this is viewed as a compelling buying opportunity. The earnings report itself was very strong and reported quarterly earnings of $1.68 per share, exceeding consensus analyst expectations of $1.59. However, the share price fell around 10% on weaker than expected guidance for the fiscal 2014 year of $5.65 to $5.75 per share versus expectations of approximately one dollar higher.

Page 1 of 2