IPO Preview: Wesco Aircraft

| About: Wesco Aircraft (WAIR)

Based in Valencia, California, Wesco Aircraft (NYSE:WAIR) scheduled a $347 million IPO with a market capitalization of $1.4 billion at a price range mid-point of $26.50 for Thursday, July 28. The full IPO calendar for the week of July 25th includes 12 IPOs scheduled to raise $2 billion.

SUMMARY -- WAIR has established a niche in the aerospace supply market with predictable sales and quite high profit margins. Sales were up, however, only 13% for the March 2011 quarter compared to the March 2011 quarter. Income increased 35% the same comparative basis.

WAIR's profit margin for the March 2011 quarter was 12.5%, the highest the company has shown. That’s about 3x as large as the primary named competitor BE Aerospace (NASDAQ:BEAV). Obviously WAIR does a good job of managing its income statement. However, WAIR”s large profit margin suggests that its profit model should be under attack, especially in a distribution business.

VALUATION -- At the price range mid-point of $26.50, and annualizing the March quarter, WAIR is valued at 16 times earnings, 2 times sales and 2.4 times book value. The comparable figures for BE Aerospace are 22, 1.8 and 2.6.

100% of IPO proceeds go to selling shareholders, which doesn’t necessarily instill investor confidence. In addition, WAIR iincurred a $7.1 million debt extinguishment charge for the June 2011 quarter, and added $14 million to the balance sheet in deferred charges related to debt refinancing.

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CONCLUSION -- On a P/E comparison basis WAIR expects to sell at a discount of 28% to BEAV, so it looks like this IPO will get done.
The key to WAIR”s growth is top line revenue expansion based on industry growth, in a mature industry.

And with after-tax profit margins above 10%, it looks like WAIR will have difficulty further increasing profit margins.

BUSINESS -- WAIR is one of the world's largest distributors and providers of comprehensive supply chain management services to the global aerospace industry.

Services range from traditional distribution to the management of supplier relationships, quality assurance, kitting, JIT delivery and point-of-use inventory management.

WAIR supplies 450,000 different SKUs, including hardware, bearings, tools and more recently, electronic components and machined parts.
In fiscal 2010, sales of hardware represented 80% of WAIR’s net sales, with highly engineered fasteners constituting 83% of that amount.

MARKET -- According to Stax, a global strategy consulting firm, the global market for C class aerospace parts, which includes hardware, bearings, electronic components and machined parts for both commercial and military customers, was approximately $6.5 billion in 2010. $4.2 billion of this market flows through distributors.

WAIR’s market is fragmented and does offer WAIR the opportunity of growing by acquisition, which is not predictable.

RECENT DEVELOPMENTS -- On April 7, 2011, WAIR entered into a new $765.0 million senior secured credit facility with Barclays Bank PLC, as administrative agent and collateral agent, and Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Key Bank, N.A. and Barclays Capital, as joint lead arrangers. The debt refinancing was to extend debt maturities.

As a result of the financing WAIT will record an immediate debt extinguishment loss of $7.1 million in the June 2011 quarter. Also $14.4 million of additional debt costs will be capitalized on the balance sheet.

COMPETITION -- WAIR estimates that Wesco and BE Aerospace (BEAV) together comprised 22% of the $6.5 billion global market for C class aerospace parts during 2010, of which $656.0 million, or 10%, was attributable to WAIR. The next largest competitors include the Pentacon business of Anixter International (NYSE:AXE) and the Pattonair business of Umeco (LON: UMC).

USE OF PROCEEDS -- 100% of the IPO proceeds are going to selling shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.