January 13, 2014
Aerospace & Defense
4Q13 Preview: Aftermarket
Most Likely to Surprise
Each quarter we refresh our ests. (see page 3)
ahead of EPS season with the goal of identifying
beats/misses and update our broader outlook. This
quarter, we highlight the following and expand on
these thoughts in the slides beginning on page 2.
Expect continued evidence of firming aftermarket -
more of the same strength from Commercial OE and
weakness from bizjet. Throughout the quarter, we
continue to see evidence of inflecting commercial
aftermarket trends as evidenced by (1) bullish company
commentary from A/M exposed suppliers as well as
reads across from related companies such as aircraft
lessors, (2) improving utilization trends across a range of
measures we track, (3) favorable revisions to global
airline profitability outlooks as best illustrated by IATA’s
2014 update, and (4) a backdrop of aging aircraft. As
such, we expect the biggest ‘surprise’ during upcoming
EPS season to be in aftermarket exposed names where
we are significantly above consensus namely BEAV and
TDG. That said, we continue to be believers in the key
themes supporting the OE cycle and expect them, along
with signs of continued company-specific execution, to
support shares of OE-bellwether BA. Regarding bizjets,
trends remain weak and in spite of incremental budget
certainty, defense exposures continue to be a relative
overhang within our Aero-focused coverage. We have
tweaked our valuation slightly in some cases to reflect
recent trading multiples (see exhibit to the right and on
pg 3) and highlight the following stock specific thoughts,
on which we expand on page 14:
(1) 2014 guidance a risk but weakness would be a
buying opp. for BA amid strong industry fundamentals
(2) We expect the biggest ‘surprise’ during upcoming
EPS season to be in aftermarket exposed names BEAV
& TDG where we are significantly above consensus
(3) Continued turnaround progress skews SPR risk to
the upside but tough to have conviction
(4) Inline on WAIR as consensus appears robust