The Long Case For Breeze-Eastern

Bryan Wagman profile picture
Bryan Wagman
298 Followers

Summary

  • Breeze-Eastern enjoys a duopoly in the helicopter rescue hoist industry.
  • Going forward, a growing installed base means that the company's ROIC should continue to rise as higher margin aftermarket parts constitute a larger portion of sales.
  • The current valuation indicates significant upside, likely a result of the stock having such a small market capitalization.

Thesis

Breeze-Eastern (NYSE: NYSEMKT:BZC) is a manufacturer of mission-critical rescue hoists, along with cargo hooks/winches, weapons-handling systems, tie down equipment, etc. The company has a market cap of just $133 million and little to no analyst coverage, leaving it significantly underfollowed. I believe this has led to a mispricing that fails to account for Breeze-Eastern's highly probable runway of long term, high margin growth. With a strong balance sheet, significant competitive advantages, and an improving narrative from a management/capital allocation standpoint, I believe Breeze-Eastern is a buy at these prices.

Company Overview

Breeze-Eastern makes most of its money from helicopter rescue hoists, an industry that is currently a duopoly. The company competes with Goodrich Corporation, a subsidiary of United Technologies (technically there is also a Russian hoist manufacturer, but it's pretty insignificant on a global scale, only serving Russia and some Eastern European countries). The following bullets give a breakdown of the company's division of revenue in 2015:

  • Products (new equipment, spares): 77%
  • --Helicopter hoist/winch products: 60%
  • --Cargo hook products: 14%
  • --Weapons handling products: 3%
  • Services (overhaul, repair, and engineering): 23%
  • --Overhaul, Repair, Maintenance Services: 21%
  • --Engineering: 2%

Also, as illustrated by the table below (taken from the 10-K), the company derives most of its sales from the U.S. and Europe (mainly NATO nations):

A few more important notes:

  • Sales (directly or indirectly) for government end use were 74% of revenues in 2015.
  • 19% of 2015 sales were to the U.S. Government (direct), United Technologies Corporation (UTX), Airbus Defense & Space ((OTCPK:EADSF), (OTCPK:EADSY)), and Finmeccanica SpA ((OTCPK:FINMF), (OTCPK:FINMY)). With the exception of Finmeccanica, most of these sales were associated with the U.S. military or defense organization of other countries.
  • All of the company's production is done in a New Jersey facility.

Long Runway For High ROIC Growth

First

This article was written by

Bryan Wagman profile picture
298 Followers
Investment analyst

Disclosure: I am/we are long BZC. 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.

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