Is B/E Aerospace Inc (BEAV) Set to Fly Higher?

Consumables Management and Business Jets

Consumables revenues rose 28.9% in the quarter, and earnings were similarly up 28.6%. It’s an area where the company has been making acquisitions, and with a cash pile of $514 million don’t be surprised if it makes more in the future. It’s also expecting significant margin expansion as the acquisitions bed in and synergies ensue. One point of note is that consumables demand is largely dependent upon hours flown by its customers, so this division is going to be cyclically aligned with passenger traffic numbers.

However, the super-cyclical segment can be found with Business Jets. Revenues increased 45.8% in the quarter and 77.1% in terms of earnings. This looks great, but it is really being driven by its Super First Class businesses. This is actually good news because it implies that if/when the global economy accelerates its growth then there is upside potential here.

Indeed, Embraer SA (NYSE:ERJ) recently gave its forecast for its jet sales in 2013. It is predicting 90-95 commercial jet deliveries from 106 in 2012. With regards to business jets, it forecasts 80-90 light executive jets from 77 in 2012 and 25-30 large executive jets from only 22 last year. So regional jet deliveries will be weaker, but executive jets are picking up. This is a good sign for BEAV’s business jet segment, and recall that BEAV is more focused on larger jets than the kind of regional jets that Embraer or Bombardier manufacture.

Where Next for BE Aerospace?

BEAV is forecasting $3.45 in diluted EPS for 2013, which puts them on a forward PE ratio of around 15.1x; for free cash flow, BEAV is predicting 70% of net earnings. This gives a figure of around $248 million or 3.6% of its enterprise value. This is not great, but then this industry is categorized by the need to invest in capital expenditures in order to service contracts.

Putting all this together leads me to conclude that an investment decision is based upon your level of belief in BEAV’s prediction that wide bodied aircraft deliveries will grow at a compound annual growth rate of 14% over the next three years. In turn that depends on the global economy and particularly emerging markets. For those of us a bit cautious on that front (or in my case on China’s growth in 2014-15) I think a larger margin of safety should be priced into this stock before buying in despite its obvious merits.

The article Is This Stock Set to Fly Higher? originally appeared on Fool.com and is written by Lee Samaha.

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