Intelligent Investing
Riding The 787 Contrails Beyond Boeing
Rick Whittington, 04.22.10, 04:00 PM EDT
Investors have awakened to growth in the Boeing food chain. There's still room to go for 787-related companies.
Both Boeing and United Technologies rocketed higher on first-quarter earnings, carrying along Precision Castparts and Rockwell-Collins to two-year highs. Wheels, brakes, engine housing and electronics supplier Goodrich just blasted to an all-time high.
Curiously the most leveraged supplier to Boeing's ( BA - news - people ) revitalized airliner fortunes, Spirit AeroSystems, has lagged the rally and is a likely catch-up candidate in front of next week's earnings. Spirit was once part of Boeing and now does major sub-assembly work for them on all their commercial airplanes as well as a rising amount on Airbus' mainstay A320 along with some business jet work still in the tank. The stock's recovered from the big hit taken after it last report in early February but since then the civil aviation outlook has materially improved. Composites supplier Hexcel ( HXL - news - people ) is another worth watching.
This brings up the question of how to value Boeing ( BA - news - people ) and its food chain now that the investment community has awakened and smelled the coffee. Boeing's earnings conference call was replete with detailed questioning on 787 and 747-8 certification, new variants of existing aircraft, and order visibility that recently prompted higher build rates of 747s and 777s. Besides eliciting positive remarks on these, the most astounding was management's response an imminent announcement to up 737 production rates that investors would be happy. Wow! The country's No. 1 exporter will be producing significantly more airliners by year-end and at the same time introducing fuel-efficient, quiet and ergonomic Dreamliners to airlines already seeing increased traffic in emerging regions. They also echoed UPS' ( UPS - news - people ) positives on international airfreight and noted defense operations are leveling off following last year's plunge.
Riding The 787 Contrails Beyond Boeing
Rick Whittington, 04.22.10, 04:00 PM EDT
Investors have awakened to growth in the Boeing food chain. There's still room to go for 787-related companies.
Both Boeing and United Technologies rocketed higher on first-quarter earnings, carrying along Precision Castparts and Rockwell-Collins to two-year highs. Wheels, brakes, engine housing and electronics supplier Goodrich just blasted to an all-time high.
Curiously the most leveraged supplier to Boeing's ( BA - news - people ) revitalized airliner fortunes, Spirit AeroSystems, has lagged the rally and is a likely catch-up candidate in front of next week's earnings. Spirit was once part of Boeing and now does major sub-assembly work for them on all their commercial airplanes as well as a rising amount on Airbus' mainstay A320 along with some business jet work still in the tank. The stock's recovered from the big hit taken after it last report in early February but since then the civil aviation outlook has materially improved. Composites supplier Hexcel ( HXL - news - people ) is another worth watching.
This brings up the question of how to value Boeing ( BA - news - people ) and its food chain now that the investment community has awakened and smelled the coffee. Boeing's earnings conference call was replete with detailed questioning on 787 and 747-8 certification, new variants of existing aircraft, and order visibility that recently prompted higher build rates of 747s and 777s. Besides eliciting positive remarks on these, the most astounding was management's response an imminent announcement to up 737 production rates that investors would be happy. Wow! The country's No. 1 exporter will be producing significantly more airliners by year-end and at the same time introducing fuel-efficient, quiet and ergonomic Dreamliners to airlines already seeing increased traffic in emerging regions. They also echoed UPS' ( UPS - news - people ) positives on international airfreight and noted defense operations are leveling off following last year's plunge.
Boeing earned $0.70 in the first quarter, $0.90 excluding the health care charge our politicians assured us would save money, and reiterated recurring earnings for the year at just under $4 per share, in line with JSA's Paul Nisbet's forecast. Revenues and profits were evenly split between commercial and military but the momentum is all on the former in keeping with a continued jaundiced view on the administration's national security plans. This will prove the case throughout the aerospace industry these next half dozen years as Boeing gets to 30 787's per quarter in 3.5 years' time, about when Airbus begins volume production on its counterpart A350. The re-engineered 747-8, incorporating composites, new engines along with a whole new cockpit and flight electronics could be joined with a similarly upgraded 777.
With EADS/Airbus back in the Air Force's $35 billion aerial tanker competition, the multi-decade program just over one year's Boeing defense sales, not much will change if Boeing loses out but there's upside to Paul's $8 2014 earnings forecast should the September nod go their way. Just how the U.S. could purchase aircraft from such a conflicted group of operators is beyond imagination but they've spent heavily on influencing the decision in ways rivaling Wall Street fund raising, so that bears are watching. Still, if Boeing nears $4 this year, $4.75 in 2011, $5.60 in 2012, $6.60 in 2013 and then that magic $8 five years from now, its shares are almost certain to exceed two and a half year's ago $105 high.
Even if already better than double last year's $30 low and Wall Street's doubting brigade are now on the story, we'd look for another 100% gain by late 2011 when the 747-8 passenger Intercontinental joins the 787 and 747-8 freighter in full service. The wild card remains the side of the company dependent upon administration willingness to continue funding military programs. The past year's foreign policy initiatives don't lend much comfort here, so investors need to ignore the rhetoric and keep their eye on the defense budget.
While augmented by the Bush defense buildup, United Technologies ( UTX - news - people ) industrial and building-related businesses that account for over three-quarters of sales and profits hugely benefited from the 2003 to 2007 global infrastructure boom. The question for investors during today's leaner military years is the extent to which emerging economies will replicate commercial demand and how much oomph the company derives from higher civil airliner production. First quarter earnings were encouraging as they registered marked gains in commercial orders up 40% year-over-year, along with continued gains in short cycle segments such as commercial aviation aftermarket, industrial electronics, residential heating and air conditioning as well as refrigeration for trucks and containers.
China, India and Brazil led the charge for 21% higher earnings rise on slightly down revenues. Otis elevators saw equipment order growth for the first time in two years while some of Carrier's increasingly profitable air handling businesses turned the corner. A recently much expanded fire and security business fared only so-so while Hamilton's industrial compressors surged in typical lead indicator fashion. Its defense activities encompass jet engines, helicopters and electronic controls. Engines go on C-17 transports, the discontinued F-22, the never quite right F-35 that just saw its anticipated peak build rates sharply reduced, legacy F-15s and F-16s and on Boeing's proposed aerial tanker. With defense capped, Pratt & Whitney's future rests on new technology engines that promise greater thrust while delivering fuel economy and lower noise primarily for commercial airliners. Sikorsky helicopters remain in moderate growth mode following two big up years to support vertical lift requirements in overseas conflicts but this effort could wind down quickly once we're out of Afghanistan.
To make the mid-point of its 2010 revenue forecast, United Technologies will shortly begin posting positive revenue comparisons that will allow them to best the $4.60 high end of their earnings guidance. We think $4.70-$4.80 is in sight, just as the just reported $0.93 for the first quarter was above Street views, to be followed by $5.20 in 2011 and $5.70 in 2012. Such an earnings pattern should generate a $100 stock within two years, about when the Fed will once again have preemptively raised rates. Whether much higher figures lie within reach is dependent upon further gains in operating margin. Already operating at the top of its prior five years range, our estimates already push the profitability envelope. Just how much more lies ahead is the big question on how much more aggressive investors should be.
With EADS/Airbus back in the Air Force's $35 billion aerial tanker competition, the multi-decade program just over one year's Boeing defense sales, not much will change if Boeing loses out but there's upside to Paul's $8 2014 earnings forecast should the September nod go their way. Just how the U.S. could purchase aircraft from such a conflicted group of operators is beyond imagination but they've spent heavily on influencing the decision in ways rivaling Wall Street fund raising, so that bears are watching. Still, if Boeing nears $4 this year, $4.75 in 2011, $5.60 in 2012, $6.60 in 2013 and then that magic $8 five years from now, its shares are almost certain to exceed two and a half year's ago $105 high.
Even if already better than double last year's $30 low and Wall Street's doubting brigade are now on the story, we'd look for another 100% gain by late 2011 when the 747-8 passenger Intercontinental joins the 787 and 747-8 freighter in full service. The wild card remains the side of the company dependent upon administration willingness to continue funding military programs. The past year's foreign policy initiatives don't lend much comfort here, so investors need to ignore the rhetoric and keep their eye on the defense budget.
While augmented by the Bush defense buildup, United Technologies ( UTX - news - people ) industrial and building-related businesses that account for over three-quarters of sales and profits hugely benefited from the 2003 to 2007 global infrastructure boom. The question for investors during today's leaner military years is the extent to which emerging economies will replicate commercial demand and how much oomph the company derives from higher civil airliner production. First quarter earnings were encouraging as they registered marked gains in commercial orders up 40% year-over-year, along with continued gains in short cycle segments such as commercial aviation aftermarket, industrial electronics, residential heating and air conditioning as well as refrigeration for trucks and containers.
China, India and Brazil led the charge for 21% higher earnings rise on slightly down revenues. Otis elevators saw equipment order growth for the first time in two years while some of Carrier's increasingly profitable air handling businesses turned the corner. A recently much expanded fire and security business fared only so-so while Hamilton's industrial compressors surged in typical lead indicator fashion. Its defense activities encompass jet engines, helicopters and electronic controls. Engines go on C-17 transports, the discontinued F-22, the never quite right F-35 that just saw its anticipated peak build rates sharply reduced, legacy F-15s and F-16s and on Boeing's proposed aerial tanker. With defense capped, Pratt & Whitney's future rests on new technology engines that promise greater thrust while delivering fuel economy and lower noise primarily for commercial airliners. Sikorsky helicopters remain in moderate growth mode following two big up years to support vertical lift requirements in overseas conflicts but this effort could wind down quickly once we're out of Afghanistan.
To make the mid-point of its 2010 revenue forecast, United Technologies will shortly begin posting positive revenue comparisons that will allow them to best the $4.60 high end of their earnings guidance. We think $4.70-$4.80 is in sight, just as the just reported $0.93 for the first quarter was above Street views, to be followed by $5.20 in 2011 and $5.70 in 2012. Such an earnings pattern should generate a $100 stock within two years, about when the Fed will once again have preemptively raised rates. Whether much higher figures lie within reach is dependent upon further gains in operating margin. Already operating at the top of its prior five years range, our estimates already push the profitability envelope. Just how much more lies ahead is the big question on how much more aggressive investors should be.
After months of citing concern that Boeing would reduce commercial production rates, key supplier Goodrich ( GR - news - people ) now echoes the new party line of rising build rates and better times ahead. Merely reaffirming prior 2010 guidance, the shares surged on first quarter earnings that were actually a touch beneath Street views, giving an idea of just how negative investor psychology has been. However, the past year's relentless evidence of economic recovery and better times ahead has finally hit the market's funny bone so that one economically sensitive stock after the other is headed upward. You can even read now that some are calling for a mini-boom in the U.S. and that technologically sophisticated industrial exports will lead the way, the upshot of which is upside for the battered supply chain names such as Moog, BE Aerospace ( BEAV - news - people ), Hexcel, Teledyne, Curtiss-Wright ( CW - news - people ) and Woodward Governor ( WGOV - news - people ). To the extent these and other aviation companies support the 787 and A350, the growth run could prove quite long, indeed, visibility for which the market will keep paying.
No comments:
Post a Comment