On Monday (1/14/2019), the Indonesian Navy recovered the cockpit voice recorder (CVR) from the Lion Air 737 MAX that crashed on 10/29/18 killing all 189 people on board. Investigators with Indonesia’s National Transportation Safety Committee (KNKT) are optimistic the CVR will provide more information leading up to the crash, particularly around the pilots’ actions to counteract the MAX’s anti-stall system. The investigation will take several months to complete.
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BA delivered 238 planes in 4Q18, modestly below our 242E but above consensus 235 and ended 2018 with 806 deliveries vs. our official 810E, consensus 803, and BA’s guide of 810-815. Still, this neared our guess of BA missing its guide by 5-8 planes as we had pointed out in our note earlier this morning (albeit for other reasons). Downside vs. our expectations came from four fewer 787s (39A vs. our 43E), three fewer 737s (173A vs. our 176E), and one fewer 777 (11A vs. our 12E) partially offset by four more 767s (14A vs. our 10E). Note: BCA “delivered” 10 767-2Cs to BDS even though the tankers have not yet been accepted by the USAF. Mix was essentially neutral. The number of MAX deliveries in 4Q18 (111A vs. our 90E) was encouraging since this suggests earlier production challenges on LEAP engines are largely behind BA.
Conventional wisdom suggests a divided Congress is generally good for stocks since Washington gridlock helps to prevent one party from enacting too much disruptive change. We analyzed historical price data for the S&P 500 and select A&D stocks over two intervals: 1929-2018 and 1973-2018. This allows us to capture 1) long-term historical trends spanning multiple economic cycles and elections and 2) a shorter timeframe but one including average annual returns for A&D stocks. We also looked at data on a calendar year basis (Jan 1st to Dec 31st) and on an annual basis in the year starting on the second Tuesday of November (an “election day cycle”). We opted for the latter since that timing is more closely aligned to changes in the political landscape.
After market close on 12/17/2018, BA announced a big bump to its capital deployment plans, quieting concerns around the U.S.-China trade dispute (for now) and the aero cycle.
President Trump told SECDEF Mattis to submit a $750B budget proposal for FY20 following last Tuesday’s (12/4) meeting at the White House, which included both chairmen of the House and Senate Armed Services Committees (HASC/SASC). This marks a reversal from Trump’s prior stance when he and OMB Director Mick Mulvaney instructed the DoD to cut spending to $700B down from the DoD’s prior $733B working assumption and FY19’s $716B, a level which Trump tweeted as “crazy” on 12/3. For now, the DoD appears to be focused on a $733B budget proposal.
Lion Air co-founder Rusdi Kirana was reportedly “furious” with BA in what he views as BA’s effort to shift blame from the OE and its recent design changes to Lion Air and the airline’s maintenance practices and pilot training. This emerged a couple days after Indonesia National Safety Transportation Committee (KNKT) released its preliminary accident report that indicated the same plane was deemed not airworthy since it experienced similar problems in a separate flight operated the day before by a different flight crew. While KNKT didn’t provide a reason for the crash, we believe it is leaning toward faulting Lion Air, given the airline’s spotty safety record. We believe Kirana/Lion Air’s 737 order review posturing is designed to pressure BA from being more vocal, and we don’t expect the airline to actually cancel its orders for 190 737s (which represent 4% of BA’s 737 backlog) en masse.
Yesterday (11/26/2018) after market close, UTX announced plans to separate into three independent companies (UTC, Otis, and Carrier) after it closed the COL acquisition. (Link here to a UTX update by Nigel Coe, our multi-industrials analyst).
We’re withdrawing our coverage of COL following the completion of its acquisition by UTX. COL is now rebranded as Collins Aerospace Systems, which combines COL with UTC Aerospace Systems (UTAS).
Finland recently met with five defense contractors bidding on HX Program to help them better understand contract parameters and offset expectations ahead of their preliminary bid. The five OEs and their platforms, in order listed by the Finnish government, are 1) BA F-18, 2) Dassault Rafale, 3) Eurofighter Typhoon, 4) LMT F-35, and 5) Saab Gripen. Ministry of Defence Project Coordinator Lauri Puranen indicated there are no favorites. That said, we believe the Eurofighter consortium will aggressively bid on the contest given its recent Belgium loss, but BA has the advantage of being the incumbent.
LMT hosted an investor day in Connecticut. We were there – snow and all. The day included a manufacturing facility tour at its Sikorsky HQ in Stratford, CT showcasing the CH-53K and Black Hawks. LMT was upbeat and emphasized Sikorsky’s future growth prospects driven by CH-53K and Future Vertical Lift (FVL). Sikorsky’s FVL offerings appear strong, and we believe LMT is well positioned to win the two upcoming competitions worth ~$100B, so long as price isn’t the only/disproportionate factor.
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