Boeing for the Aerospace Recovery? Try LMI Aerospace Instead

The aerospace and defense sector is beginning to look very good. The components of this group look insulated from the overall problems of the economy. They also have been beaten up a little since the beginning of the year and that makes them a good value. Many of these companies have a five year PEG ratio under one. There is also a good growth play, as the commercial airlines in the US need to replace ailing aircraft and emerging markets around the world have customers that want to fly. This bodes well for Boeing (BA), but some investors want a smaller stock that offers better growth and upside.

LMI Aerospace (LMIA) looks to have a lot going for it. They provide design engineering services, structural components, and assemblies to aerospace and military companies. They produce over 30,000 parts and have integrated seven acquisitions since 1996.

The reason this company is a better investment than 10 years ago is that they now provide engineering and manufacturing. This provides as a one-stop shop for much of the work that needs to be done on Aircraft. They are a better choice with respect to outsourcing work. They also have increased manufacturing to handle more complex parts and increase speed of the work done. They also have moved into composite technologies expanding the scope of what they can fabricate.

Their strong relationships with companies like Boeing, Kawasaki, Honeywell (HON), and GE (GE) positions them well. They have managed to diversify themselves. In 2001, this company received 52% of their revenues from large commercial aircraft, 17% from the military, 15% from corporate and regional aircraft, 9% technology, and 7% other. These revenues were $71 million. By 2007 they had $168.5 million in revenues and 37% was large commercial aircraft, 34% corporate and regional aircraft, 23% military, 3% technology and 3% other.

From these numbers it is seen that they have increased their corporate jet position substantially. This is on the expectations that their supplying Gulfstream and Bombardier will continue to lead growth. Wall Street Research reported that starting in 2003 and ending this year the CAGR is over that period 19%. LMIA's position has seen CAGR of 22% as they have grown and taken market share.

Commercial Aircraft should increase growth substantially. The Monitor reported that an estimated 1,037 would be delivered this year. In 2009, 1,133 would be delivered and 2010 1,180 would be delivered. That is more than double the 575 delivered in 2003. LMIA provides fuselage skins, wing skins, leading edges, door components and cockpit window frames for all major Boeing models.

Their military market also has some areas of growth. If we look at the full year 2007 Greenbook, full year 2008 budget request and Wall Street Research we see that the defense aircraft budget for the United States will see 11% CAGR from 2006 to 2010. The Teal Group August of 2007 stated that Blackhawk production would increase 19% CAGR from 2007 to 2010. LMIA provides components for the UH-60 Blackhawk, UH-64 Apache, B-52 Bomber, V-22 Osprey, F-15 Eagle, F-16 Fighting Falcon, F/A-18 Hornet, C-17 Globemaster, and C-130 Hercules.

Their growth strategy seems sound as they now can provide large kit work on aircraft saving their customer money by decreasing cost through providing more per purchase. They are also maximizing their use of lower cost manufacturing areas, while leaning their manufacturing to increase margins. Their capabilities are increasing as they combine engineering and production, so customers can go to one site for the idea and plans, plus have them build the product. They have increased assembly capability through composite technologies. All of this seems to have worked as they have estimated a large increase in revenue for 2008 at $251.57 million, a 49.3% increase from 2007.

First quarter earnings were $.40 per share, 17.65% higher than estimates of $.34. This caused a triple top breakout on May 7th that created a bullish trend. Look for the stock to go higher.

Disclosure: None

Comments

[ChandlerLutz]

Nice article about a company I did not previously know about. They look like they have some potential in this field, but just by reading this article I have a couple of questions. You mention their military unit, and that they supply parts to the V-22 Osprey, F-15, F-16 and F-18. This concerns me because the V-22 is a complete debacle and production should should be canceled and all planes should be put out of service. Also, the F-15, F-16 and F-18 are all aging planes that are likely to all be replaced in the next 15 years by newer and more capable F-35 which will be exported to every country in Western Europe not to mention and maybe some of our allies in southeast Asia. Also, you mention a strong relationship with Boeing, but what about Airbus? If this company supplied parts to both companies they would tremendous potential. The strong relationship to Boeing concerns me. The 787 is seeing delay after delay and their complacency with regard to the air tanker contract was quite discouraging....

[MichaelFilloon(legmaker)]

Very good points Chandler, and many of these planes are getting older, we will have to see if they sign any deals on the newer aircraft for military, as for right now they have not announced any. As for Beoing, they have most of their products going on current models that are being bought overseas as emerging markets start buying things like the 737 for travel within their countries to replace current bussing systems. This should keep them going until revenues really take hold in 2009 for the Dreamliner. I do not know of any current contracts on the Airbus A380. Thanks for you interest.