AUSA kicked of its annual three-day event on Monday, 10/14. All defense primes and many defense contractors were present, along with several high-profile officials including Army Secretary McCarthy. We attended, too. Much of the products on display were aligned to the Army’s six modernization priorities, and the overall tenor at the conference was positive/optimistic.
Search Coverage List, Models & Reports
Search Results1-10 out of 203
BCA delivered 63 planes in 3Q19, five fewer than our forecast driven by hurricane disruption at its North Charleston facility and customer timing (to a lesser extent) but partially offset by some more 767 deliveries. Overall, mix was modestly negative pressuring margins. At BDS, there were 77 total deliveries (49 new and 28 remanufactured/renewed) driven by more Apache deliveries (both sequentially and year-over-year basis) and tracked ahead of our expectations. Overall, we’re trimming our 3Q19 sales to $19.3B (from $20.0B), EBIT margin to 7.2% (from 7.6%), and EPS to $2.19 (from $2.35), but we’re largely maintaining our full-year 2019 estimates since we view the 3Q19 BCA delivery softness as weather-related disruptions that will be resolved in 4Q19.
The U.S. Trade Representative (USTR) plans to implement tariffs on a broad range of EU exports starting on 10/18/19. (The U.S. requested a procedural meeting with the WTO on 10/14/19 to formally approve the countermeasures; WTO authorization is automatic.) This notice shortly follows WTO’s decision this morning (10/2) authorizing the U.S. to impose $7.5B of tariffs as countermeasures to compel the EU to end its non-WTO compliant subsidies to Airbus. Although today’s WTO ruling caps a 15-year trade dispute filed by the U.S. in 2004, the EU has a parallel challenge also with the WTO. In that case, the WTO determined the U.S. provided non-WTO compliant subsidies to Boeing, and one piece – the Washington state tax break valued at ~$100M per year – remains in effect. Among U.S. airlines, we believe tariff talk is impacting current order negotiations, but we believe most U.S. airlines with Airbus planes currently on order still have far more questions than answers.
The WTO is expected to formally authorize a U.S. request to impose tariffs on various EU exports this week. The WTO arbitrators met Monday (9/30) to finalize their decision on the tariff amount, expected to total ~$7.5B per year. This determination caps a 15-year trade dispute between the U.S. and EU over illegal subsidies the EU and four member states (France, Germany, Spain, and the UK) provided to Airbus, notably enabling the company to develop and launch the A380 and A350.
On Saturday (9/14), a series of drone and missile attacks debilitated Saudi Arabia’s oil industry after strikes on Saudi Aramco’s Abqaiq oil processing facility and Hijra Khurais oilfield removed ~5.7M barrels a day of crude production, representing roughly half of Saudi’s daily capacity. Houthi rebels in Yemen claimed responsibility, but U.S. intelligence refuted that claim and instead blamed Iran for launching more than 20 drones and at least a dozen ballistic missiles. Saudi officials, however, aren’t ready to assign responsibility to Iran citing insufficient evidence provided by U.S. intelligence that Iran was the staging ground.
Last week, BA announced two separate 777 orders: first with KLM for two 777-300ERs, and second with China Airlines for six 777Fs. Neither of these are new orders. The KLM order was previously booked on BA’s orderbook as unidentified and the China Airlines order was a finalization for the remaining three planes of an agreement announced earlier this year at the Paris Air Show. Still, identifying the customers firms it up a bit and they underscore BA’s efforts to firm up orders and shore up its 777 bridge especially since the late 2020 target for the 777X entry into service (EIS) looks increasingly aggressive, in our view. Even without the latest door incident (discussed below), we see EIS timing getting pressured by 1) the GE9X engine redesign that pushes first flight from 2019 to 2020 and 2) a potentially longer and more thorough certification process given the public scrutiny following the MAX crash and subsequent grounding.
We are introducing 2020 quarterly estimates and adding 2021-2023 annual estimates to our models in our A&D coverage. We believe the defense backdrop remains resilient given continued elevated threats (more at state level now than the asymmetric warfare encountered during much of the past two decades), but the U.S. defense budget trajectory is flattening per FY20-21 budget compromise. We believe in the commercial aero cycle and strong underlying demand for air travel, but we struggle with valuations and potential second derivative fallout issues from the MAX grounding.
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.
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.
Last week (6/19), the House passed H.R. 2740, a package of four FY20 appropriation bills including defense. The vote was 226-203, largely along party lines with seven Democrats opposing the bill including Rep. Alexandria Ocasio-Cortez (D-NY), who we believe may be emerging as a prominent voice against robust defense budgets. For the DoD, the House appropriations bill provided $690B for the defense discretionary budget comprising $622B for base and $68B for OCO. This level of funding falls below both the President’s budget request and the Senate NDAA mark-up of $718B, and the bill transferred $98B of otherwise base budget requirements tucked in OCO back to the base budget. The White House has already threatened to veto the bill.
- 1 of 21
- next →