SPR reported 1Q20 EPS of ($0.79) ex-items, ahead of consensus of ($1.27) as MAX delays and Covid-19 related production cuts by OEMs drove charges on lower projected margins for key programs. SPR will deliver no more than 125 MAX shipsets to BA this year, implying only ~10/month as BA works through its own undelivered backlog of 450 already completed MAX aircraft. The focus on the call was cash burn and maintaining liquidity through what will certainly be a tough year, SPR called its liquidity position adequate. Despite these challenges (and negative FCF), SPR is moving forward with its two planned major acquisitions of Asco and certain Bombardier assets.
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TDG reported F2Q20 GAAP net income of $319M relative to our estimate of $172M. TDG laid out its assumptions for sales growth in F2H20 in all three end markets, and though management was pretty clear those assumptions weren’t guidance, they seem as good a guess as any. It isn’t pretty, with TDG planning for Comm A/M sales -70-80% y/y, Comm OE sales -25-40% y/y, and Defense up MSD y/y over the next two quarters. TDG is rightsizing its business via layoffs (25%) and other cost cuts. TDG is known for its high EBITDA margins (45-50%), mainly a function of pricing and cost efficiencies at Comm A/M. That mix shift is obviously a headwind as airlines ground and idle aircraft, but TDG hopes to hold the line above 40% EBITDA margins (along with positive FCF) as they endure the pain. We do not expect that to happen. TDG also may have “mix of mix” headwinds with regard to pricing on more discretionary aftermarket products.
In mid-March we built an interactive model with key drivers that show BA’s annual cash projections through YE23 under various scenarios. We are updating that model to incorporate 1Q20 results as well as updated estimates. We refined some aspects of the model around working capital and incremental debt raises.
Three A&D companies we follow reported 1Q20 earnings yesterday (04/29/20). The stock performance of the three stocks was mixed in a strong tape as cyclical names outperformed.
LMT reported 1Q20 EPS of $6.08 ahead of our $5.93E and consensus of $5.80. Upside to our estimates came on higher sales across all segments (+$0.37), only partially offset by worse than expected margin at Space (-$0.21). It’s actually hard to have a slightly boring earnings call in today’s world, but LMT somehow pulled it off, speaking to their stability.
HXL reported 1Q20 results last night (4/20) and hosted its earnings call today. Adjusted EPS came in at $0.64 compared to our estimate of $0.71 and consensus of $0.72, with the miss coming on lower margins at engineered products largely due to 737 MAX production halt and a bit of Covid-19 impact. HXL withdrew all previous 2020 guidance points, temporarily suspended its dividend, and paused its stock buyback program. Management is doing what they can in a deteriorating demand environment, showing nimbleness through cost control measures and prudent inventory management in order to right size the business. This is necessary in order to overcome the fixed cost absorption that comes with a step-down in the supply chain. HXL also reminded investors of the fungibility of its assets to pivot away from existing programs on an opportunistic basis, if needed.
We are updating estimates today (4/21/20) for our commercial aerospace coverage to reflect a more bearish outlook. Changes to our commercial aerospace estimates can be found on page 2. We are also providing initial thoughts on HXL after its earnings report on 4/20 after the market close.
BA said today BCA delivered 50 planes in 1Q20, below our estimate of 63. The difference in our estimate came from 14 fewer widebodies (10 fewer 787s, three fewer 777s, and two fewer 747s partially offset by one more 767) as well as one more 737. Notably, BA had 191 MAX cancellations in the quarter, with 150 of those coming in March.
Terminating coverage post UTX merger. We are withdrawing our coverage of RTN following the completion of its merger with UTX.
We are updating estimates today for our A&D coverage to consider the impact of Covid-19, as well as additional recent debt raises. Changes to our commercial aerospace and defense estimates can be found on pages 2 and 3, respectively. While defense stocks should see relatively less direct impact from Covid-19, we assume some disruption of supply chains for manufacturers, a little bit less short cycle-type work as contractors are sent home, and incremental interest expense from recent debt raises. We also update our pension estimates for poor asset returns.
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