Goldman Sachs published a report entitled "Global: Aerospace & Defense" on January 6, 2012. The report isn't available online, but we will discuss its main points. In their report, David H. Perry, Noah Poponak, Terry Darling, and Omear Khalid have discussed how the Aerospace sector is expected to benefit from "a unique growth and visibility given record backlogs, a replacement cycle, increasing emerging market demand, and new product cycles." Defense, in their opinion, "faces a potential decade-long downturn as governments fix balance sheets and the current U.S. war effort in Southwest Asia is reduced."
Here are some of the stocks discussed in the report:
Boeing (BA) designs, develops, manufactures, sells, and supports commercial jetliners, military aircraft, satellites, missile defenses, human space flights, and launch systems. Goldman Sachs (GS) is bullish on Boeing and is of the opinion that the company's margins and cash flows are going to improve over the next few years. With a record amount of backlog, Boeing is currently in the middle of a commercial aerospace order. Also, free cash flow is expected to be greater than net income for the next few years, due to the Boeing 787 development effort. Shares of Boeing are currently being traded at $75 per share and are expected to reach a price target of $88, showing a potential upside of 17%. Boeing is trading at 10.3x the CY13 expected earnings per share.
BE Aerospace (BEAV) designs, manufactures, sells, and services commercial aircraft and business jet cabin interior products. Goldman Sachs has given the company a buy-rating as it expects BE Aerospace to benefit from the secular themes in the new Aerospace cycle. Since BE Aerospace has an exposure to both the OE and aftermarket segments, it is likely to benefit from the convergence of the two markets. The market shifts towards wide-body aircraft will also benefit the company as it is currently carrying a large stock of these aircraft. Shares of the company are trading at $41.7 per share and are expected to reach a price target of $47 by the end of 2012. It is currently trading at 11.6x the CY13 expected earnings per share.
Precision Castparts (PCP) manufactures and sells metal components. Goldman Sachs is bullish on the stock due to its leverage to the OEM cycle, and high returns. According to Goldman Sachs, Precision Castparts has the highest quality products and is the best managed company in its sector. The company is increasing its presence in the late cycle power/energy markets and is looking to generate strong free cash flows with new acquisitions. Shares of the company are currently trading around $175 per share and are expected to reach a price target of $200. It is expected to have a price-to-earnings ratio of 19.2x by the end of the first quarter of 2012 and a dividend yield of 0.1%.
Embraer (ERJ) is a company that develops, produces, and sells jet and turboprop aircraft for both the civil and defense aviation markets. Goldman Sachs has given Embraer a buy-rating due to its rising market share and its high dividend yield. Over the last two years, the company has won most of the new orders, giving it a dominant position in the regional jet market. Its balance sheet has a net cash position and it has a dividend yield of 3%. Shares of the company are currently trading at $26.4 per share and are expected to go north of $35, indicating a potential upside of 32.5%. It has a price-to-earnings ratio of 14.6x.
L-3 Communications (LLL) provides command, control, communications, intelligence, surveillance, and reconnaissance systems. Goldman Sachs has given the company a sell rating mainly due to its exposure to low-end Government Services where it is facing competitive pricing pressures. The company is also facing higher delays, cancellations, protests, and losses than its peers. Also, it could not generate a large amount of revenue from its war efforts in Southwest Asia. Shares of the company are currently trading around $68 per share and are expected to go south of $64. It reported a dividend yield of 2.7% and has a price-to-earnings ratio of 7.6x.
Northrop Grumman (NOC) is a provider of products, services, and solutions to the aerospace, electronics, and information sectors. It has been given a sell rating by Goldman Sachs. According the Goldman Sachs, the company has significant exposure to the reduction in spending by the U.S. Department of Defense. Trade with the Pentagon is expected to be tougher, resulting in a decline in margin. Northrop Grumman also has lower returns on capital as compared to its peers. Shares of the company are currently trading at $58.6 per share and are expected to go south of $48 per share by the end of 2012. It is expected to report a dividend yield of 3.4% and a price-to-earnings ratio of 8.3x.
Huntington Ingalls (HII) designs, builds, and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard. Goldman Sachs has given it a sell rating due to its high exposure to the U.S. Department of Defense spending, which is expected to decrease. In Goldman Sachs' Defense coverage, Huntington Ingalls has the lowest margin and free cash flow to net income ratios. It also has the most levered balance sheet and is not expected to improve its margins anytime soon. Shares of the company are currently trading at $32.60 per share and are expected to fall to a price target of $24. It is trading at 8.8x the CY13E earnings per share.