TDG posted adj EPS of $4.95, above our $4.25E and consensus of $4.31. Shares of TDG popped +14% on strong performance especially at defense (+19% y/y) and comm OEM (+10%), and the $30 special dividend.
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SPR reported 2Q19 adjusted EPS of $1.71 (including a $0.11 litigation settlement bene), beating our $1.65E and consensus of $1.64. Not surprisingly, questions revolved around the 737 MAX (e.g., build rates and margin headwind), and SPR provided largely satisfying responses. SPR is proactively taking measures to the extent it can to mitigate the financial impact, removing fixed costs and, it seems, preparing for a long winter storm.
RTN reported 2Q19 EPS of $2.92 widely beating our $2.66E and consensus of $2.64. Upside vs. our expectations came primarily from better MS and IIS margins (+$0.20/sh) and stronger SAS and IIS sales (+$0.05/sh). Shares of RTN surged today and outpaced both defense peers and the broader market, we believe, driven by strong bookings (similar to NOC’s stock action yesterday when it posted B:B of 1.6x) and improved margin performance especially at MS.
BA, GD, and NOC hosted 2Q19 earnings calls today. We recap all reports here and show estimate changes on p. 2. And we downgrade BA.
Today, media reported that BA withdrew from the Ground-Based Strategic Deterrent (GBSD) competition. This is surprising to us since BA, just yesterday on its 2Q19 earnings call, indicated that it was an interested bidder. In a statement BA said the current acquisition approach didn’t create a level playing field. It’s unclear if the USAF will continue with only NOC or revised the RFP to compel BA to bid for the contract. This is particularly interesting to us because we believe the big primes viewed GBSD as a program that would be awarded on technological ambition and not costs. NOC yesterday on its call noted its “technically mature” GBSD offering which stuck out to us (we asked about it on the call) and suggested there may be more of a cost focus than perhaps the primes were anticipating last year. If that’s true, it is all the more surprising that BA is opting out given BA’s willingness to underbid on key programs last year. Maybe BA has had enough of that type of thing, which may be a positive read for industry B&P behavior going forward.
LMT reported 2Q19 EPS of $5.00 slightly ahead of our $4.91E but beating consensus of $4.77. Upside vs. our estimates came from lower tax rate (+$0.08/sh) since higher sales were offset by slightly lower margins and other items netted each out. MFC posted strong growth (+16% y/y) driven by ramping production rates on tactical and strike weapons, as well as higher sales on hypersonics and classified programs; LMT expects MFC to be its fastest growing business area for the next couple of years. Still, shares of LMT (and other defense primes) were under pressure throughout most of the day likely over concerns that the defense budget cycle is peaking under the FY20 budget compromise.
HXL reported 2Q19 EPS of $0.94, modestly above our $0.91E and consensus $0.89. Upside vs. our expectations came from slightly higher GM (+$0.01/sh), lower R&T spend (+$0.01/sh), and lower tax rate (+$0.01/sh). Shares of HXL rallied today and closed +4% driven by strong execution and its reaffirmation of comm aero CAGR of 6-9% during 2018-2021 and “fairly steady” growth in FCF.
After close today (7/18/19), BA announced a $5.6B pretax charge (or $8.74/share) associated with estimated costs from potential customer concessions and other considerations for disruptions related to the 737 MAX grounding and subsequent delivery delays. In addition, BA noted 737 program margins would absorb an incremental $1.7B of expenses driven mainly by higher costs related to a longer-than-expected cut in build rates (recall pre-crash, BA was gearing up to hit 57/mo in 2019). BA expects higher program costs will weigh on 737 program margins starting in 2Q19 and extending into the quarters (and, we believe, years) ahead. In total, BA called out $7.3B of MAX-related charges, in line with our $7-8B estimate, but we expect BA will book additional period expenses as it gets more clarity.
BCA delivered 90 planes in 2Q19 matching our expectation and comes as no surprise given the MAX grounding and subsequent delivery suspension. Mix was slightly favorable driven by three more 787-9s and -10s, two fewer very low-margin 787-8s, and one more 777. At BDS, there were 36 total deliveries (18 new builds and 18 remanufactured), somewhat less than what we were expecting. Recall, the Air Force slowed tanker acceptances to 1/month from 3/month after discovering more foreign object debris (FOD) in newly assembled tankers even after the Air Force halted deliveries twice this year over the same FOD issue. Tanker deliveries declined by two aircraft sequentially: BCA transferred six 767-2Cs to BDS in 2Q (vs. eight in 1Q) and BDS delivered five tankers to the Air Force in 2Q (vs. seven in 1Q). Overall, our 2Q19 sales estimate moves 2% higher to $20.3B and our EPS inches up $0.03 to $1.68.
We estimate the MAX issue will cost BA $2M per month for each MAX that is out of service for a total impact of $7-8B. We derive this from public comments of MAX operators. Of course, it isn’t that simple. But we lower our target price from $431 to $404 for BA, with ~$14/share coming from direct MAX penalties and the rest from second derivative issues we foresee. For example, we are now working under the assumption the NMA won’t happen, lowering R&D spend but also lowering our BGS sales and margin estimates since aftermarket work was a key component to an already suspect NMA business case. NMA may still very well go ahead as planned – key customers want it – but BA has its hands full and the competing A321XLR is off to a strong start. We assume BA accelerates the so-called Future Small Aircraft (FSA) program with R&D starting to ramp in earnest in 2022.
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