Why Hedge Funds Like B/E Aerospace Inc (BEAV)?

About BEAV

B/E Aerospace Inc (NASDAQ:BEAV) is the world’s leading manufacturer of high quality aircraft cabin interior products for commercial airliners and business jets. The company serves nearly all of the world’s major airlines, leasing companies, and aircraft manufacturers through its direct sales and customer support organizations. Hedge funds like BEAV because the company is a secular play on rising commercial air travel in emerging markets. Increased demand for air travel translates to strong demand for the parts BEAV manufactures and distributes.

Developments/ Catalysts

B/E Aerospace Inc (NASDAQ:BEAV) reported strong first quarter earnings of $0.81 per share on sales of $717 million, beating estimates by $0.02 per share and $18.98 million. Operating earnings at BEAV’s commercial aircraft segment rose 6.4% year-over-year to $104.7 million, while operating income at the company’s Business Jet segment dropped 9.5% year-over-year to $24.7 million. Book to bill ratio was 1.1 and net earnings rose 6% year-over-year to $82.6 million. Because of the robust quarterly results, management raised full year 2016 earnings per diluted share guidance to $3.20-$3.25 per share, and also increased the quarterly dividend by 10% to $0.21 per share.

Some worry that Boeing’s entry into the parts sector might negatively affect BEAV. BEAV management has largely brushed aside the threat of Boeing, however, hinting that Boeing is just entering the sector because one of its suppliers was behind schedule and holding up the delivery of airplanes. B/E Aerospace Inc (NASDAQ:BEAV)  management notes that Airbus has done the same thing with SFE seats and that BEAV’s business is still healthy. BEAV does have a total backlog of $8.9 billion, and the company’s free cash flow is expected to rise to around 100% of earnings from the current 75%. BEAV’s results could also get better now that crude prices have increased. If crude prices increase, emerging market demand could rise and BEAV’s business jet segment will experience higher demand.

B/E Aerospace Inc (NASDAQ:BEAV) currently looks cheap with a forward P/E of 12.88. As we noted before, however, some of the company’s buybacks don’t translate directly to share reduction. In 2015, the company spent $150 million in stock buybacks but reduced its diluted share count by just 0.9 million shares. When adjusting for that discrepancy, BEAV’s forward P/E is closer to 17, which still makes the stock a good holding given the company’s rising dividend and increasing backlog.

During the first quarter of 2016, the hedge fund sentiment towards B/E Aerospace declined and 36 funds tracked by Insider Monkey reported holding $1.07 billion worth of stock as of the end of March, having amassed 22.60% of the company’s outstanding stock. This compares with 44 funds holding stakes with an aggregate value of $977.40 million at the end of December. The largest position in B/E Aerospace Inc (NASDAQ:BEAV) was held by Thomas Steyer’s Farallon Capital, which reported holding 3.40 million shares, down by 26% on the quarter. It is followed by billionaire John Paulson’s Paulson & Co., which initiated a stake containing 3.0 million shares during the first quarter.

Disclosure: none