We are finally compelled to make some assumptions around the timing and magnitude of the impact of 737 MAX delivery delays using the information we have today. Though the factors underlying our assumptions are certain to change, for now we assume the MAX stays grounded until mid-June and deliveries start again in July. The net impact is ~$600M in lower 2019 OCF in our BA model and $6 out of our target price.
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TDG completed its acquisition of ESL last Thursday (3/14) for $4.0B consisting of an estimated $3.7B in cash (at $122.50/share) and $273M of assumed net debt (now retired). Timing of the close was in line with expectations. TDG paid an implied EV/EBITDA multiple of 12x and EV/S multiple of 2x based on FY19 consensus EBITDA of $330M and sales of $2B, putting this deal at the high end of TDG’s target 9-12x range. That said, TDG is optimistic it can rationalize this “misunderstood” company and make operations leaner, more efficient, and more profitable. TDG recognizes ESL’s EBITDA margins won’t reach its corporate average of ~50%, but management expects significant improvement from the 14.1% ESL realized in FY18. We believe TDG is embolden by its success with the Kirkhill lab experiment (TDG bought Kirkhill from ESL last year).
We believe Delta Air Lines (DAL) is increasingly making aircraft purchase decisions based on the earnings potential it can generate from overhauling engines on the plane for other airlines. DAL has expressed enthusiasm for BA’s NMA (they did so again yesterday) noting an interest to be a launch customer. But we believe the likelihood of DAL buying the NMA may have been lessened by Rolls-Royce (RR) pulling its UltraFan engine offering from the NMA competition due to DAL’s focus on aftermarket work.
The Finnish Ministry of Defense issued a query potentially looking to acquire airborne electronic attack aircraft to replace its F-18 fleet as part of its HX Fighter Program competition. The DoD subsequently gave BA and the Navy the green light to offer the EA-18G Growler to Finland making that country the second international customer approved to buy Growlers. Australia is the only other Growler operator.
We read 10-Ks for the A&D companies we cover and pulled some of the more interesting nuggets from each, so you don’t have to. We also updated our estimates (see Exhibit 1 on page 2 for summary of changes to the commercial aero names and Exhibit 2 on page 3 for summary of change to defense names).
When BA launched the 787 program in 2004, it marketed the aircraft as an enabler of airlines opening new routes (long, thin ones). BA said the 787 (then-7E7) would open up over 450 new routes globally. Last year, 787s flew on 1,150 routes, 233 of which we call “new,” as in, the route had never been operated by the airline that flew it prior to that airline getting a 787. Since the 787 entered service in 2011, global airlines opened up 265 new routes using 787s – meaning 32 of those 265 routes failed, as we define it.
UAL today (2/6/2019) announced it will reconfigure 50 of its CRJ-700s by removing 20 seats and adding a premium cabin, cutting seat count down from 70 to 50 while creating a new type of aircraft, the so-called CRJ-550. Shares of Bombardier rallied 6% on this today and shares of Embraer fell by 4%. We will have more on the impact to UAL in future airline research, but there’s an A&D angle here we think the market isn’t appreciating.
TDG posted adjusted EPS of $3.85, handily beating both our $3.49E and consensus $3.43. Upside vs. our expectations came from better sales (+$0.19/sh), lower SG&A (+$0.11/sh), and interest expense (+$0.12/sh) partially offset by higher taxes (-$0.09/sh). GM expanded 60bp y/y to 56.8% (in line with our target) reflecting pricing and productivity improvements and new business wins. SG&A also came down by 30bp to 12.3% (vs. our 13.1%E) on solid cost control. EBITDA as defined of $487M (49.0% margin) tracked ahead of our $462M (48.0%). This was a solid quarter on strong organic growth (+11.6% y/y) and very good margins. TDG is executing well heading into the ESL integration.
TDG pre-reported earnings this morning (1/29/19) as management prepares to secure financing for its ESL deal. Overall, preliminary numbers look good (see Exhibit 1 in the PDF). Sales grew 17% y/y to $993M, above our estimate of $964M and consensus $953M. EBITDA as defined of $487M also beat our/consensus estimates by ~5%. And EBITDA margin improved by a healthy 160bp y/y to 49.0% (vs. our 48.0%E and consensus 48.8%), perhaps suggesting a re-acceleration in the all-important commercial A/M. We’ll get more details when TDG reports earnings next Tuesday, 2/5.
On 1/17, the DoD released its MDR, the first update to the country’s missile defense strategy since 2010 under the Obama administration. The report focuses on ways to enhance the nation’s missile defense system as adversaries’ offensive missile capabilities improve and missile technologies proliferate. But unlike the past study, the 2019 MDR includes threats from non-ballistic missiles given recent developments in advanced cruise missiles and hypersonic weapons by a revisionist Russia and an increasingly militarily assertive China.
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