B/E Aerospace: Follow-Up On Full-Year 2015 Earnings

| About: B/E Aerospace (BEAV)

Summary

Earlier on Seeking Alpha, I hypothesized the Street was underestimating 2016/2017 potential.

Given full-year results and recently upped 2016 guidance, those thoughts may have been founded.

Shares continue to trade at a rich free cash flow yield, and shareholder returns continue to grow.

B/E Aerospace (NASDAQ:BEAV) recently reported fiscal Q4 and full-year 2015 results early on Tuesday, February 2nd. The initial reaction was relatively muted (given results largely met expectations) but the shares have rallied strongly in the past few days, and are now up over 8% compared to a moderate loss in the S&P 500. Clearly, the market is seeing some good signs for the company once they dug deeper into earnings, but what are those results?

Full-Year Review

Going into 2015, B/E Aerospace was heading into a milestone year for the company, setting itself up to stand on its own after its KLX (NASDAQ:KLXI) business spin-off. Full-year guidance at the start of the year was $3.00/share, which the company met handily, albeit with a little bit of a sigh of relief from me. This is in spite of not meeting revenue expectations due to the fall-off in oil prices (related to its jet business, made up of primarily foreign customers like the Russian elite who depend on oil prices), a first class product's revenue recognition being pushed into 2016 from 2015, and foreign exchange impacts that have impacted nearly every industrial company. Despite these revenue headwinds, margin improvement has been incredibly solid, which helped the company meet guidance from the beginning of 2015 despite the aforementioned bumps that kept B/E Aerospace from meeting top-line guidance.

2016/2017 Guidance Boost

In a recent Seeking Alpha article, I proposed that current guidance for 2016/2017, and analyst expectations, were too low given Amin Khoury's commentary on reaching a 2.5x net debt/EBITDA target almost solely through organic growth. My thesis at its core was that B/E Aerospace management would not guide to this target without having at least some backlog visibility towards that profitability, putting that figure within reach by the company's booked backlog, or two years out.

Given updated guidance, it appears I may have been on to something. I forecast earnings per share of $3.21/share in 2016; well above analyst expectations at the time. B/E Aerospace has since guided to $3.20/share in 2016. This is the first step towards investors who have been long for some time to get rewarded for patience. The market has continuously discounted the 2016/2017 guidance of the company, and by the middle of the year, we should get concrete numbers on 2017 guidance. If it meets my expectations of a 22% increase in earnings per share from 2016 numbers to $3.91/share, shares will vault forward if they haven't already. Assuming 100% free cash flow conversion, 2017 net income of $386m represents a free cash flow yield of nearly 6% at current share prices. This isn't riveting, but it is a more compelling value considering the significant moat the company has. I've never claimed this company is a double, but it does represent a compelling risk/reward for even risk-averse investors that should exceed broader market returns.

Part of my analysis depended on share buybacks, which the company remains committed to. B/E Aerospace is working on establishing a reputation as a significant free cash flow generator with a growing shareholder rewards program. While many retail and some institutional investors are often late to these changes, the inflow of investing dollars will likely push share prices up from here in my opinion. Per company management, $500m in shares are set to be repurchased from 2015-2017, with $150m of that already having taken place in 2015. At current share prices, the remaining $350m would represent an 8m share count reduction, or nearly 9% of the float. This will be a significant tailwind to share prices, along with the company's dividend policy. Free cash flow conversion of net income is set to increase towards 100% as a result of a move towards cash flow generation in the company's seller furnished equipment business, which are sales made directly to OEMs like Boeing (NYSE:BA) instead of being sold to airlines like Delta (NYSE:DAL) or American (NASDAQ:AAL) during retrofits of older planes or new builds after delivery.

Conclusion

The growth within SFE sales shows B/E Aerospace's entrenchment within this industry. Boeing and Airbus (OTCPK:EADSY) now starting to include the company's products on their builds prior to delivery to airlines shows that B/E Aerospace can compete even with the aircraft manufacturers themselves on both quality and cost.

North American penetration continues to improve. Business wins on the American carriers (American, Delta, United (NYSE:UAL), Southwest (NYSE:LUV), et al.) reached 77% in 2015. Chances are when you take your next flight, you're sitting on a B/E Aerospace product. Much like 3M (NYSE:MMM), there is significant value in investing in companies that become incredibly core to certain markets. B/E Aerospace remains a strong buy in my opinion.

Disclosure: I am/we are long BEAV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.