While ESL has strong breadth across the typically late-cycle aerodefense market, the firm thinks its 18% sales (higher % for EBIT) exposure to comm’l aftermarket will allow it to benefit from the nearer-term recovery in spares demand that they anticipate in 2010. Thus the firm sees a single down EPS year in ‘09 as ESL’s diverse markets and acquisitive strategy should drive growth thereafter.
A Volatile Chart: The Feb. sell-off to $20 traces to an abnormally soft FQ1 (Dec) of $0.38 which startled investors following 8 prior qtrs averaging $0.93 (albeit w/ volatility). The mkt rightfully questioned ESL’s $3.70-$3.90 FY09 guidance after it delivered only 10% in FQ1. However, since then, airline traffic seems to be near bottom, and markets are now considering longer-term earnings pwr. With a more typical FQ2 report of $0.85 in May and an adj. in guidance to a more reasonably achievable range of $3.00-$3.20, the shares rallied quickly to above $30 on 6/5. Credit Suisse sees the recent pull-back to $26 as a good opportunity to get more involved.
Diversified Supplier w/ Global Reach: Aero spares comprise ~35% of revs (w/ higher margins), & they expect comm’l spares to recover late this year or early next. In military, ESL has solid int’l exposure of 10-15% offering diversity away from a slowing US DoD budget. Regarding recent U.S. defense cuts, Sec. Gates clear support for JSF (>$1M content/unit) trumps any negative news elsewhere (e.g. A400M).
New $43 TP: Today, ESL is CSFB's least expensive aero name w/ a P/E of 8.4x (CY09) & 7.3x (CY10E) & EBITDA multiple of 5.6x & 5.3x, respectively, offering a discount to peers of 12-28% . As well, the B/S is solid w/ net debt at 28% & FCF yield of 11%. Firm thinks the days of trough multiples (10x) on trough earnings are over as the mkt gains visibility. Thus, they expand out target multiple to the more historically normalized 12x for ESL’s comm’l aero (40% of total) and industrial ops (20%). For the defense biz (40%), which has sufficient int’l retrofit exposure to outpace U.S DoD budget growth, teyapply a slight premium of 10% to the 11x avg the firm uses for Pentagon-dominated peers, yielding a new TP of $43.
Notablecalls: This is a pretty gutsy call from CSFB's Aerospace & Defense team. They are basically saying commercial air traffic will recover...which is kind of suspect.
I checked with my aero/def analyst contact this morning and all he had to say was that this sure is a gutsy call. He calls the valuation interesting but notes the '..earnings stream is incredibly lumpy and they will leave you hanging as they don’t give any guidance...'
So there you have it.
I think ESL will trade up considerably today based on this call but is it really investable? Guessing 5-6% upside.