We are updating the allocation of points in our “Balance of Power” short-term
outlook. The total number of points is 1,700: 100 for each stock in our coverage
universe. We summarize our thoughts on the rankings below:
• Lowering BA to 95 (-20) and SPR to 75 (-35) following 787 schedule
bounce. SPR outperformed our universe by 11% last month, making it the best
performer in the group, while BA outperformed by 7%. We had raised these
stocks last month on the belief that the stocks might pop on the announcement,
and now that this has happened, other concerns such as narrowbody production
rates and the cash flow outlook take on greater importance. SPR is now our
lowest-ranked SMID stock and cash flow remains among our top concerns.
• Augustine testimony and COL guidance are catalysts this month. Norm
Augustine will testify Sept 15-16 on the options for human space flight, some of
which involve canceling ATK’s Ares I program. An Ares cancellation would cut
ATK estimates, but ATK was the worst performing stock in our group last
month and YTD, and we believe most of the bad news is priced in. While there
could be some more near-term downside, we are raising ATK to 110 (+30).
COL should issue guidance in the next week or so, and we could see the stock
moving up or down depending on the magnitude of the incentive comp and
pension headwinds management has already pointed to, so we are lowering COL
to 100 (-20). COL remains a top longer term pick, and a dip on FY10 guidance
could present an attractive entry point.
• Bizjet sentiment improving. We’ve felt a more positive vibe on bizjets recently
with used inventory ticking down slightly and flight ops edging upward. We
believe sentiment could continue to grow more positive near term with the G650
rollout approaching on Sept 29 and the NBAA convention on Oct 20-22, and we
are increasing GD to 110 (+15) and Bombardier to 120 (+35), while ERJ
remains our top SMID stock at 125. While we expect near-term optimism, we
are not calling the bottom of the production cycle. Further production cuts seem
likely next year, particularly for large jets, and while used inventories peaked in
Nov 01 last cycle, deliveries did not trough until 1Q03.
• Budget developments unlikely to benefit defense stocks. We are reducing
RTN to 90 (-10) and LLL to 85 (-5), and NOC remains our lowest ranked large
cap stock at 80. While it’s too early to reach firm conclusions about the QDR
and FY11 budget, there should be a trickle of news as the services develop their
plans, and we expect to hear more about small and mid-size program cuts. In
addition, investor focus may shift to the magnitude of the pension headwind
RTN will face in 10. LMT remains our top-ranked large cap stock at 125, and
we believe anticipation of the first F-35 flight in full STOVL mode, likely in
Oct, could support it.
• Please see the body of our note for our price targets, methodologies, and
risks, as well as an aerospace/defense catalyst calendar.