The business-jet market, which has struggled since the Great Recession, is showing signs of a comeback. While that potentially could benefit the entire industry, the plane maker that offers the most promise to investors appears to be General Dynamics, whose Gulfstream models are among the most popular corporate jets.
The other major players include Textron, which owns the Cessna franchise; Embraer (ERJ), the Brazilian upstart that has made inroads at the lower end of the market with its Phenom planes; and Canada’s Bombardier, whose products include the Learjet.
In August, U.S. takeoffs and landings by business jets increased 5.7% year over year, the biggest rise since September 2014, according to the Federal Aviation Administration. July’s activity was much softer, but increases in the previous four months averaged 3.5%. “The strong August could set up the next couple of months for solid growth, and we now see 2017 utilization up close to 3.5%,” analyst Myles Walton of Deutsche Bank Markets Research wrote recently.
Although the fundamentals are improving, 2017 aircraft deliveries are expected to be only flattish with last year’s, which were down 8% from 2015’s 616. The industry took a symbolic hit recently when General Electric (GE) announced that it would ground its fleet of corporate jets to cut costs, and instead use charter flights. In addition, demand in emerging markets, including China, Latin America, and Eastern Europe, which helped fuel sales earlier in the decade, has been weak, although it has stabilized lately.
Nonetheless, the long-term outlook “is better than at any time post–financial crisis,” says Drew Lipke, an analyst at Stephens who sees a recovery becoming more apparent in 2019, although he doesn’t have a specific sales forecast.
Annual business-jet deliveries peaked in 2008 at 1,317 planes, according to the General Aviation Manufacturers Association trade group. Since then, consistent growth has been elusive, in part because of a glut of used jets that hurt both resale values and prices of new jets.
THE GLUT IS GRADUALLY shrinking. “The rate of pricing decline in the used market has become more rational and more predictable,” says David Strauss, an analyst at UBS (and no relation to the author of this article). In line with that, in this year’s first six months, 10.8% of all business jets were for sale, about a percentage point less than the level a year earlier, according to Jetnet, an aviation consultancy. At its worst, in 2009, during the financial crisis, the tally topped 16%.
General Dynamics’ (GD) Gulfstream models have done relatively well during the industry slump. The G650 aircraft, which can fly up to 7,000 nautical miles and seat 19 passengers, “has been a key driver that’s allowed them to come through this downturn fairly well,” says Strauss. New G650 models sell in the $60 million range. Last year, Gulfstream shipped 115 business jets; in this year’s first half, 60.
General Dynamics’ aerospace business is reasonably diversified, with about 20% of its $8.4 billion in sales last year coming from services, including maintenance. The parent company also does a lot of business with the Department of Defense, which accounted for half of its $30.9 billion of overall sales last year—providing ballast until the business-jet market rebounds.
While the stock fetches 19.5 times the $10.53 a share that General Dynamics is expected to earn next year, it’s “definitely not pricing in a recovery of Gulfstream,” says Strauss, who thinks the shares, recently at $205, could hit $240 in 12 months.
Textron got about 25%, or $3.4 billion, of its revenue from business-aircraft sales last year. In 2015, the company launched its Cessna Citation Latitude, a midsize jet that can fly 2,700 miles. A more advanced plane, the Longitude, is expected to be rolled out soon.
Analysts anticipate that Textron, whose products include Bell helicopters, will earn $2.52 a share this year, about 10 cents below 2016’s profits, and $2.92 next year. At a recent $53 and change, the shares were fetching 18.8 times forward earnings, well above their average over the past decade, according to FactSet. Lipke of Stephens rates the stock Equal Weight, in part, he says, because “there’s already a lot baked into expectations.” That means potential buyers would be wise to wait for a pullback before pulling the trigger.
THE MAIN TRADING arena for Bombardier shares is Toronto, although shares also trade over the counter in the U.S. under the symbol BDRBF. Business jets account for about 35% of its sales.
But Bombardier, which has received help from the Quebec provincial and federal governments in Canada, faces stiff headwinds. It has a heavy long-term debt load—$8.8 billion, as of June 30. And its costly C Series regional passenger-jet program, aimed at challenging Boeing and Airbus single-aisle jets, got some bad news last week when U.S. trade officials said they would impose a large tariff on any new sales to U.S. airlines. The stock lost 7.5% of its value on Sept. 27 alone.
As for Embraer, it has made considerable headway in business jets and “is now considered an established player,” says Deutsche Bank’s Walton. Last year, it delivered 117 jets, 63 of which were its Phenom 300 model. It also sold more than 40 of its Legacy models, which are bigger, more expensive, and can fly farther than the Phenoms.
But because Embraer is relatively new to this market, it doesn’t have the base of existing planes for servicing and spare parts that rivals do. That makes its operations less profitable—although the situation will improve over time. The company, which made $1.58 a share last year, is expected to earn $1.71 this year. Throw in worries about Brazil, however, which has struggled with a deep recession and political corruption, and its stock doesn’t look likely to fly too high anytime soon.
Original article can be found here ➤ http://www.barrons.com
No comments:
Post a Comment