The on-going drama about the US defense budget is posing a big challenge to the defense sector. Yet, on the other hand, the improving air traffic is providing a good opportunity to the commercial aircraft makers. The main driver in the Aerospace sector is the growing passenger travel demand mainly in Asia and the Middle East. Moreover, the growing demand for the fuel-efficient aircrafts has further intensified the competition in this sector. In this article, I have picked up three companies from this sector which have recently reported their quarterly earnings. Let's discuss each of these stocks in detail.
Last 6m Stock movement (~)
Precision Castparts (PCP)
United Technologies Corp. (UTX)
Honeywell International Inc. (HON)
Source: Yahoo Finance
Last month, Precision Castparts posted solid 3Q13 results with its total sales up by ~13% y/y to ~$2 billion. This was mainly driven by its airframe products segment which was up by a strong ~32% y/y growth to ~$597 million. The other segments, investment cast products and forged products, also witnessed a decent increase in their y/y sales of ~5% and ~9% respectively for the quarter. The company's decent performance is also a result of its recently closed acquisitions which expanded its capabilities in delivering higher value to its customers. Going forward, I believe that Precision will continue with its long-term growth and increased margins because of its accretive acquisitions and its capacity utilization improvements.
Year to date, Synchronous is Precision Castparts's fourth acquisition in the aerostructure market while the previous acquisitions were McSwain, Centra and Klune. The company is making a sizeable presence by applying the vertical integration model in its aerostructure market. Synchronous core capabilities in gantry machining, hard-metal machining, high-speed machining, turning, sheet-metal forming, and metal and composite bonding are located in Wichita (KS), Santa Ana (CA), Kent (WA) and Tulsa. Precision Castparts will get benefit from the proximity of these locations to the company's existing operations. Products manufactured by Synchronous are used by the world's leading commercial, space and military platforms. ~90% of Synchronous revenue is generated from commercial aerospace programs that include 787, 747-8 and 737. With this acquisition Precision Castparts will be able to achieve good cost synergies as the company will be able to pull in-house purchases of fasteners, castings, & forgings, which Synchronous currently has to buy from other vendors. This deal is also expected to provide Precision Castparts with ~1% of incremental gain in its operating profits.
United Technologies Corp
The Company posted its fourth quarter as well as full year earnings for 2012. 2012 was a transformational year for the company where it has significantly completed its acquisitions and also the divestitures of its non-core portfolio. 4Q12 EPS of $1.04 was down by ~27% from last year due to the restructuring charges. However it posted a ~14% increase in its quarter sales of ~$16.4 billion. For the full year, the sales were up by ~4% at ~$57 billion which was a little short of the consensus prediction of ~$58.2 billion. The company's record breaking deal with Goodrich of ~$18.5 billion in 2012 is considered to be one of the biggest deals in the aviation industry. This acquisition will help the company in product integration of Boeing and Airbus and also in cost savings. Goodrich is known as a leader in the aircraft landing gear segment and will provide United Technologies a strong foothold in the aerospace market. With the growth in commercial aerospace and the cost synergies created by the Goodrich deal the sales are expected to be ~$13.5 billion to ~$14.5 billion in the coming time.
Additionally the company has also announced that it will be reshaping its portfolio by divesting its non- performing assets which do not fit anymore into its strategy. And with this in mind, it sold its United Technologies Power fuel cells unit to ClearEdge Power which manufactures proton exchange membrane (PEM) fuel cells to focus more on its aerospace business and commercial business.
This company also posted its 4Q12 and full year results recently. Honeywell's sale was up by ~3% to ~$37.7 billion and the full year EPS showed a good increase of ~41% to ~$3.69. The profits in the aerospace segment were up by ~13% which was highest among all segments. Its aerospace business is providing it a great opportunity to buy winning contracts in line. Honeywell is the biggest supplier of 737 MAX which includes the systems for environmental controls, auxiliary power supply and avionics. It received a contract from the Boeing Co. for the supply of electronic bleed air system which controls the cabin pressure and keeps ice off the wings, with the first delivery to be made in 2017. With this order, the total number of contracts has reached 1009 year to date from different companies.
Coming to its next achievement, the company made a deal with China Eastern Airlines to supply the wheels and brakes for its existing as well as new Boeing 737 NG aircraft and 50 new Airbus A320 aircraft. Honeywell was chosen by China Eastern Airlines for its specialty in cost efficient, reliable and safe landing systems for modern fleet lines. This delivery is scheduled to be made in the next three years.
To sum up, I feel the aerospace sector can be a great investing opportunity for the investors. Precision Castparts is already the best in class in the aerostructure market. With a solid list of existing acquisitions Precision Castparts has a potential for making further acquisitions of ~$4 billion to ~$5 billion. And, the expected free cash flow of ~$1.2 billion in FY2013 gives a great expectation of robust growth. On similar lines, both the other two players, United Technologies and Honeywell, also have strong prospects with their acquisitions as well as new orders. I recommend a buy rating for all the three stocks.