Bombardier (BBD-A.TO) To Launch The CSeries And Compete In The 100 - 150 Seat Market; Senior VP At Wedbush Securities And Aviation Expert Identifies His Top Performing Stocks
December 15, 2011 - The Wall Street Transcript has just published Aerospace and Defense Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Kenneth Herbert is a Senior Vice President of Equity Research at Wedbush Securities and covers stocks in the industrial growth sector focusing on companies in the aerospace and defense sector. He joined Wedbush from Frost & Sullivan, where he was Global Vice President and Partner. Previously, Mr. Herbert worked at Salomon Smith Barney, where he was an Associate supporting the number one Institutional Investor Analyst in the machinery sector. He previously was also a Consultant with Defense Forecasts Inc. Mr. Herbert brings more than 20 years of experience as a Financial Analyst and Consultant in the aerospace industry to Wedbush. He has a B.A. from the University of California, Santa Cruz, and an MBA from the University of Michigan.
TWST: To get started, please give us a brief overview of your coverage universe.
Mr. Herbert: I focus more on commercial aerospace. I cover Boeing (BA), Precision Castparts (PCP), Spirit AeroSystems (SPR), TransDigm (TDG), Triumph (TGI), HEICO (HEI), Hexcel (HXL), Rockwell Collins (COL), Goodrich (GR), AAR (AIR), Ducommun (DCO) and Curtiss-Wright (CW). Most of the companies have aerospace and defense exposure, but it's slanted more toward companies with commercial aerospace exposure, and then within that it's a healthy mix of companies that are more focused on the aftermarket versus companies that are more focused on original equipment production.
TWST: Which companies have the greatest exposure to that risk of decreased defense spending?
Mr. Herbert: Within my universe, companies like Rockwell Collins, with approximately 60% of sales to the government; both Boeing and AAR, where they generate about half of their revenues from defense; Triumph Group, which generates about 35% of its revenues from defense. But outside of my coverage universe, it's Lockheed Martin, it's Northrop (NOC), it's Raytheon (RTN), it's General Dynamics (GD) and the pure-play defense companies.
TWST: Is there anything else you'd like to discuss?
Mr. Herbert: It's an interesting sector right now and there is a lot going on. Expect acquisitions to continue to be an important part of the story for a lot of the companies. And again, it is really going to be about earnings growth moving forward, and what kind of execution companies are going to be able to continue to put up.Another thing I would mention is we haven't talked much about the Boeing 787, which is an important catalyst for the sector. We had the first delivery to ANA (9202.TYO) of Japan at the end of September. Boeing expects by this time next year to have another seven or eight airlines with these planes in service. There is a lot of debate right now about the strength of the backlog - Boeing has 820 of these planes on order - and what could happen next as airlines continue to get some operating specifics on these airlines.
I'm a firm believer that there is a decent amount of pent-up demand for the aircraft, and you will see continued strength in orders for both new wide-body aircraft - the 777, 787 and A350 - over the next couple of years. So I'm pretty bullish on the airlines right now. Boeing's new narrow body, the 737 Max, has some questions around it, but it has approximately 600 orders, and it will be a key reason why Boeing's book to bill should remain over one through 2013. I believe that with the Max and the 787, you're going to see positive book-to-bill numbers, which is a very strong indicator for the stock.
TWST: Are there any other significant new aircraft introductions from other companies as well?
Mr. Herbert: Bombardier (BBD-A.TO) is launching the CSeries, which is designed to compete in the 100-to-150-seat market. That's had a bit of a rocky start. There is a lot of skepticism on ultimately how successful that plane will be. That's certainly worth watching. It's worth watching what Embraer (ERJ) decides to do in terms of its narrow-body strategy, which we should know more about later this year. And then finally, certainly you need to watch what the Chinese do with their new narrow body, the C919, which is designed to compete directly with Boeing and Airbus in the 175-seat market. So clearly there continues to be a lot of new products on the market in the transport side. We didn't really talk about the business jet side, but certainly on the transport side there are a lot of new aircraft coming onto the market from new companies that traditionally aren't in this market, which are worth watching very closely right now.
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