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.
The company is expected to focus on the following items in its earnings call:
Capital deployment / the M&A pipeline.
Arkwin synergies.
Commercial aftermarket trends.
Impact of sequestration on defense order activity.
OE ramp.
Acquisition integration.
Triumph Group Inc (NYSE:TGI) investors are not triumphant
Triumph Group Inc (NYSE:TGI) was recently downgraded to neutral by Goldman Sachs Group Inc (NYSE:GS) since the stock has displayed a 30% gain since January. The Street continues to favor Triumph Group Inc (NYSE:TGI)’s exposure to aerospace OE and next-generation aircraft. However, the margins for these segments have improved substantially, which means less of an upside remains ahead.
As far as the outlook is concerned, Triumph Group Inc (NYSE:TGI) is expected to raise its 2014 EPS outlook. The estimate is 5% above the mid-point of the company’s guidance range. Triumph Group Inc (NYSE:TGI)’s guidance is conservative, particularly with respect to its operating margin assumption. For the earnings call, following issues will be thoroughly analyzed:
The commercial OE cycle.
The 787 ramp
The 747-8 program (the company is a supplier to both of The Boeing Company (NYSE:BA)’s aircraft.)
The impact from sequestration
Goodrich Pump & Engine Control Systems (GPECS) integration; GPECs was acquired by Triumph Group Inc (NYSE:TGI)from United Technologies Corporation (NYSE:UTX) in January.
Cash generation improvement
Final word
In the article, we noted that two drivers of aerospace revenue are on a rise (i.e. aerospace OE and aftermarket) while one is on a decline (defense due to budget cuts) and one is expected to rise in the foreseeable future (business jet sales). As far as the “Ts” of the Aerospace are concerned, TransDigm Group Incorporated (NYSE:TDG) is recommended as a buy given its historically strong performance in the universe. Textron Inc. (NYSE:TXT) and Triumph Group Inc (NYSE:TGI) are recommended as “hold” on the basis of sluggish growth in the business-jet market and upside already priced in the stock, respectively.
The article 1 Aerospace Company to Buy, 2 to Hold originally appeared on Fool.com and is written by Zain Abbas.
Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends TransDigm Group (NYSE:TDG). The Motley Fool owns shares of Textron. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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