speednews regional & corporate aviation suppliers conference a view from wall street ronald j...
TRANSCRIPT
SpeedNews Regional & Corporate Aviation Suppliers Conference
A View From Wall Street
SpeedNews Regional & Corporate Aviation Suppliers Conference
A View From Wall Street
Ronald J EpsteinRonald J Epstein
Discuss market trends from an investor perspective
Equity market conditions
Review regional jet market ML regional jet forecast
Review business jet market conditions and opportunities ML business jet forecast
Conclusions
Discuss market trends from an investor perspective
Equity market conditions
Review regional jet market ML regional jet forecast
Review business jet market conditions and opportunities ML business jet forecast
Conclusions
OverviewOverview
Equity Market ConditionsEquity Market Conditions
Equity Market PerformanceEquity Market Performance
Investors prefer Aerospace: YTD, Aerospace & Defense has outperformed both S&P 500 and DJ Industrial Average
Investors prefer Aerospace: YTD, Aerospace & Defense has outperformed both S&P 500 and DJ Industrial Average
Source: Bloomberg
90%
95%
100%
105%
110%
115%
120%
1/3/06 3/3/06 5/3/06 7/3/06 9/3/06
Rel
ativ
e Pr
ice
Perf
orm
ance
S&P Supercomposite A&D Index S&P 500 DJ Industrial Av erage
S&P Supercomposite A&D Index
S&P 500
DJIA
A&D Outperforming S&P 500A&D Outperforming S&P 500
6.1%
7.2%
8.6%
9.1%
9.9%
10.4%
10.6%
14.2%
17.2%
17.7%
24.2%
25.3%
25.4%
30.7%
32.4%
33.8%
36.8%
59.4%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Em braer
NASDAQ
Goodrich
L-3 Com m unications
Crane
S&P 500
Northrop Grum m an
Boeing
United Technologies
Textron
Raytheon
General Dynam ics
Rockwell Collins
Precision Castparts
Trium ph Group
Moog
Lockheed Martin
Garm in
YTD Perform ance
Aerospace/Defense ValuationAerospace/Defense Valuation
Price 30 Oct 2006 Equity Enterprise P/E (x) EV/EBITDA (x) EV/Sales (x)
Company Symbol Opinion Objective Price Capitalization Value CY2005A CY2006E CY2007E CY2008E FY2005A FY2006E FY2007E FY2005E FY2006E FY2007E
S&P Composite SPX500 17.1 15.5 15.2
LARGE CAP
Boeing* BA 1 - Buy $97.00 $80.22 $63,414 $62,079 25.1 31.8 16.9 13.6 14.4 14.1 9.1 1.2 1.0 1.0
Lockheed Martin LMT 2 - Neutral 87.03 38,406 40,562 21.2 15.5 15.1 13.6 11.0 8.7 8.5 1.1 1.0 1.0
General Dynamics GD 1 - Buy 80.00 71.46 28,906 29,128 19.7 17.0 14.9 13.5 11.5 9.8 8.7 1.4 1.2 1.1
Northrop Grumman NOC 2 - Neutral 66.47 23,318 26,851 17.4 14.8 14.0 13.3 9.1 8.1 7.8 0.9 0.9 0.8
Raytheon RTN 2 - Neutral 49.87 22,382 25,203 24.0 17.8 16.6 14.9 12.0 11.9 11.5 1.2 1.1 1.0
Average 21.5 19.4 15.5 13.8 11.6 10.5 9.1 1.1 1.0 1.0
MULTI - INDUSTRY
United Technologies UTX 1 - Buy $70.00 $65.52 $66,110 $71,487 21.0 17.7 15.8 14.6 11.6 10.0 9.2 1.7 1.5 1.4
Textron* TXT 1 - Buy 100.00 90.60 12,037 11,932 24.0 16.9 14.6 12.6 10.5 8.8 7.4 1.2 1.0 1.0
Crane Co. CR 2 - Neutral 38.76 2,412 2,679 17.2 14.4 12.5 11.1 9.9 8.5 7.5 1.3 1.2 1.1
Average 20.7 16.3 14.3 12.7 10.7 9.1 8.0 1.4 1.2 1.2
SMALL & MID CAP
Garmin GRMN 1 - Buy $60.00 $52.56 $11,475 $11,054 38.4 25.6 21.0 18.4 29.1 20.2 17.0 10.8 6.6 4.7
Rockwell Collins COL 2 - Neutral 58.27 10,250 10,370 25.4 21.0 18.8 16.6 15.1 13.0 12.2 3.0 2.7 2.5
L-3 Communications LLL 2 - Neutral 81.14 10,005 14,523 19.4 19.6 14.1 12.8 12.6 10.4 9.6 1.5 1.2 1.1
Precision Castparts PCP 2 - Neutral 67.71 9,290 10,174 28.6 20.2 16.6 14.9 19.7 15.5 10.8 3.4 2.9 2.1
Embraer ERJ 1 - Buy 45.00 41.47 7,133 6,606 16.4 16.3 12.6 10.5 11.7 11.9 8.2 1.9 1.7 1.3
Goodrich GR 1 - Buy 50.00 44.65 5,608 7,281 21.0 16.8 14.0 12.1 9.6 8.2 7.3 1.3 1.2 1.2
Moog MOGA 1 - Buy 44.00 37.98 1,547 1,899 22.5 18.4 16.3 14.5 13.1 10.1 8.9 1.8 1.5 1.3
Triumph Group TGI 2 - Neutral 48.48 778 983 29.4 18.9 14.7 12.9 15.9 11.2 9.2 1.4 1.3 1.1
Average 25.1 19.6 16.0 14.1 15.8 12.6 10.4 3.1 2.4 1.9
Source: Merrill Lynch
Note:
Enterprise Value equals market value plus straight debt plus straight preferred less cash and equivalents
Free cash flow equals cash from operations less capex
*Debt excludes finance debt for Boeing and Textron
Civil Aero OEM Stock Performance Since 2001Civil Aero OEM Stock Performance Since 2001
Since 2001, Aircraft prime manufacturers have appreciated. Bombardier’s shares; however, continues to lag the group
Since 2001, Aircraft prime manufacturers have appreciated. Bombardier’s shares; however, continues to lag the group
Source: Bloomberg
0%
20%
40%
60%
80%
100%
120%
140%
160%
1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006
Rel
ativ
e Pr
ice
Perf
orm
ance
EADS BA ERJ Bombardier
Bombardier
EADS
Embraer
Boeing
Civil Aero OEM Stock Performance YTDCivil Aero OEM Stock Performance YTD
Issues at EADS have plagued the stock, Bombardier stock recovers a bit Issues at EADS have plagued the stock, Bombardier stock recovers a bit
Source: Bloomberg
50%
70%
90%
110%
130%
150%
170%
1/2/2006 3/2/2006 5/2/2006 7/2/2006 9/2/2006
Rel
ativ
e Pr
ice
Perf
orm
ance
EADS BA ERJ Bombardier
Bombardier
EADS
Embraer
Boeing
Business Jet Manufacturer Stock PerformanceBusiness Jet Manufacturer Stock Performance
Business jet OEM appreciate since 2001 Business jet OEM appreciate since 2001
Source: Bloomberg
0%
50%
100%
150%
200%
250%
1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006
Rel
ativ
e Pr
ice
Perf
orm
ance
Bombardier Embraer General Dy namics Ray theon Tex tron
Bombardier
Embraer
General
Dy namics
Tex tron
Ray theon
Business Jet Manufacturer Stock PerformanceBusiness Jet Manufacturer Stock Performance
Biz Jets Performed Relatively Well So Far in 2006 Biz Jets Performed Relatively Well So Far in 2006
Source: Bloomberg
80%
90%
100%
110%
120%
130%
140%
150%
160%
1/2/2006 3/2/2006 5/2/2006 7/2/2006 9/2/2006
Rel
ativ
e Pr
ice
Perf
orm
ance
Bombardier Embraer General Dy namics Ray theon Tex tron
Embraer
Bombardier
Tex tron
Ray theon
General
Dy namics
Regional Jet MarketRegional Jet Market
Regional Jet Market ConditionsRegional Jet Market Conditions
Stored fleet of modern RJs remains relatively low
Orders moving towards larger aircraft
Fleet skewed towards 50-seat aircraft
Stored fleet of modern RJs remains relatively low
Orders moving towards larger aircraft
Fleet skewed towards 50-seat aircraft
1,644
100
579
377
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
40-50 51-72 73-89 90-110
Seat Sizes
Num
ber
of In
serv
ice
Air
craf
t
2.1%
0.2%
7.6%
10.8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
40-50 51-72 73-89 90-110
Seat Sizes
% O
n O
rder
RJ
Air
craf
t % R
J Fl
eet
4.0%
2.6%2.3%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
40-50 51-72 73-89 90-110
Seat Sizes
% S
tore
d R
J A
ircr
aft %
RJ
Flee
t
50-Seat Fleet Evolution – A Deep Downturn50-Seat Fleet Evolution – A Deep Downturn
0
20
40
60
80
100
120
140
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD
2006
Stor
ed 5
0-se
at R
Js
0
50
100
150
200
250
300
350
400
450
500
50-s
eat R
J de
liver
y an
d or
ders
Stored Deliv eries Orders
0
20
40
60
80
100
120
140
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD
2006
Stor
ed 5
0-se
at R
Js
0
50
100
150
200
250
300
350
400
450
500
50-s
eat R
J de
liver
y an
d or
ders
Stored Deliv eries Orders
Stored fleet increases
Deliveries fall off
Orders fall off
2005 increase in 50-seat RJs resulted from Chapter 11 of Independence Air
Stored fleet increases
Deliveries fall off
Orders fall off
2005 increase in 50-seat RJs resulted from Chapter 11 of Independence Air
50-Seat Jet Considerations50-Seat Jet Considerations
Is there a glut of 50-seaters? –Yes
In the market dead? –No 50-seats is a natural market size There will be a replacement market
Cannibalization by larger aircraft
Emerging market joint ventures: China, Russia?
– HNA Group orders 50 ERJ-145 from Harbin-Embraer
Traditional secondary markets still developing
Is there a glut of 50-seaters? –Yes
In the market dead? –No 50-seats is a natural market size There will be a replacement market
Cannibalization by larger aircraft
Emerging market joint ventures: China, Russia?
– HNA Group orders 50 ERJ-145 from Harbin-Embraer
Traditional secondary markets still developing
Regional Jet Concept is EvolvingRegional Jet Concept is Evolving
What is a Regional Jet? Capacity: 50-Seats, 70-Seats, 100-Seats Range: 1000 NM, 1500 NM, 2000 NM Very confusing to investors
Next Generation Aircraft = Small Narrowbody Jets E-170/-190 Family C-Series RRJ and ARJ Boeing and Airbus move into this market?
What is a Regional Jet? Capacity: 50-Seats, 70-Seats, 100-Seats Range: 1000 NM, 1500 NM, 2000 NM Very confusing to investors
Next Generation Aircraft = Small Narrowbody Jets E-170/-190 Family C-Series RRJ and ARJ Boeing and Airbus move into this market?
Are scope clauses irrelevant?Are scope clauses irrelevant?
From an OEM perspective “scope clauses” have become less relevant due to changes in pay and other work rules
Airline bankruptcies have help close at least part of the scope arbitrage US Airways, Air Canada and other airlines have
worked around scope clauses
– Revised labor rates at mainline make scope less meaningful
– Air Canada example: CRJ-200 $77 (at Jazz), 5 yr ERJ 190 captain $118, A320 $156
From an OEM perspective “scope clauses” have become less relevant due to changes in pay and other work rules
Airline bankruptcies have help close at least part of the scope arbitrage US Airways, Air Canada and other airlines have
worked around scope clauses
– Revised labor rates at mainline make scope less meaningful
– Air Canada example: CRJ-200 $77 (at Jazz), 5 yr ERJ 190 captain $118, A320 $156
100-Seat Market is Real – Not Just North America100-Seat Market is Real – Not Just North America
ERJ-170 Interior
An ERJ-190
Rationalization of pilot pay structures and “re-gauging” on domestic routes will drive E-Jet market share gains
Rationalization of pilot pay structures and “re-gauging” on domestic routes will drive E-Jet market share gains
Investor ConsiderationsInvestor Considerations
50-seat jets were controversial in both the equity and fixed income markets
Small Narrow body jets are less controversial and gaining global investor appeal
E-Jets are a more favorable asset class in the financing community than 50-seat jets and derivatives
Investors are treating the next generation of small narrow body jets more like traditional narrow body jets
50-seat jets were controversial in both the equity and fixed income markets
Small Narrow body jets are less controversial and gaining global investor appeal
E-Jets are a more favorable asset class in the financing community than 50-seat jets and derivatives
Investors are treating the next generation of small narrow body jets more like traditional narrow body jets
2004 2005A 2006E 2007E 2008E 2009EBombardier CRJ 100/200/440 100 44 12 6 6 6 CRJ 700 64 50 48 45 43 40 CRJ 900 14 27 24 20 20 15Total, Bombardier 178 121 84 71 69 61
Embraer ERJ-135/140/145 91 48 14 15 15 15 ERJ-170 46 46 33 34 40 45 ERJ-175 0 14 12 20 24 29 ERJ-190 0 12 45 54 62 64 ERJ-195 0 0 4 20 24 27Total, Embraer 137 120 108 143 165 180
Total, regional jets 315 241 192 214 234 241
Merrill Lynch Regional Jet ForecastMerrill Lynch Regional Jet Forecast
Business Jet MarketBusiness Jet Market
Business Jet Market is ThrivingBusiness Jet Market is Thriving
Demand continues to be robust in all market segments
Deliveries could peak in 2007/2008 2008/2009 “Available for sale” fleet as % of fleet beginning to
climb, but still near 15 year average levels Historical data suggests bottom in “available for sale”
fleet leads peak in new deliveries by 1 to 2 years
– R2=0.49 for lights, R2=0.52 for mid-size, R2=0.32 for heavies
Potentially disruptive forces on the horizon for light jets and avionics
Demand continues to be robust in all market segments
Deliveries could peak in 2007/2008 2008/2009 “Available for sale” fleet as % of fleet beginning to
climb, but still near 15 year average levels Historical data suggests bottom in “available for sale”
fleet leads peak in new deliveries by 1 to 2 years
– R2=0.49 for lights, R2=0.52 for mid-size, R2=0.32 for heavies
Potentially disruptive forces on the horizon for light jets and avionics
Light Business Jet Secondary MarketLight Business Jet Secondary Market
-
200
400
600
800
1,000
Jan-9
0Ja
n-91
Jan-9
2Ja
n-93
Jan-9
4Ja
n-95
Jan-9
6Ja
n-97
Jan-9
8Ja
n-99
Jan-0
0Ja
n-01
Jan-0
2Ja
n-03
Jan-0
4Ja
n-05
Jan-0
6
Num
ber
for
Sale
0%
5%
10%
15%
20%
Jan-9
0Ja
n-91
Jan-9
2Ja
n-93
Jan-9
4Ja
n-95
Jan-9
6Ja
n-97
Jan-9
8Ja
n-99
Jan-0
0Ja
n-01
Jan-0
2Ja
n-03
Jan-0
4Ja
n-05
Jan-0
6
For
Sale
as
% o
f Fle
et
USA76%
AFRICA1%
SEASIA0%
CAMERICA7%
SAMERICA6%
EUROPE9%
OCEANIA1%
15 to 20 years10%
20 to 25 years21%
25 to 30 years31%
> 30 years11%
10 to 15 years11%
5 to 10 years10%
< 5 years6%
Source: AMSTAT
Age Distribution
Geographic Distribution
Jets Available for Sale
Jets Available for Sale as % of Fleet
Medium Business Jet Secondary MarketMedium Business Jet Secondary Market
< 5 years13%
5 to 10 years21%
10 to 15 years15%
15 to 20 years10%
20 to 25 years23%
25 to 30 years12%
> 30 years6%
USA79%
AFRICA0%
SEASIA1%
CAMERICA4% EUROPE
13%
0
100
200
300
400
500
Jan-9
0Ja
n-91Ja
n-92Ja
n-93Ja
n-94Ja
n-95Ja
n-96Ja
n-97Ja
n-98Ja
n-99Ja
n-00Ja
n-01Ja
n-02Ja
n-03Ja
n-04Ja
n-05Ja
n-06
Num
ber
for
Sale
0%
5%
10%
15%
Jan-9
0Ja
n-91Ja
n-92Ja
n-93Ja
n-94Ja
n-95Ja
n-96Ja
n-97Ja
n-98Ja
n-99Ja
n-00Ja
n-01Ja
n-02Ja
n-03Ja
n-04Ja
n-05Ja
n-06
For
Sale
as
% o
f Fle
et
Source: AMSTAT
Age Distribution
Geographic Distribution
Jets Available for Sale
Jets Available for Sale as % of Fleet
Heavy Business Jet Secondary MarketHeavy Business Jet Secondary Market
0
50
100
150
200
Jan-9
0Ja
n-91Ja
n-92Ja
n-93Ja
n-94Ja
n-95Ja
n-96Ja
n-97Ja
n-98Ja
n-99Ja
n-00Ja
n-01Ja
n-02Ja
n-03Ja
n-04Ja
n-05Ja
n-06
Num
ber
for
Sale
0%
5%
10%
15%
Jan-9
0Ja
n-91Ja
n-92Ja
n-93Ja
n-94Ja
n-95Ja
n-96Ja
n-97Ja
n-98Ja
n-99Ja
n-00Ja
n-01Ja
n-02Ja
n-03Ja
n-04Ja
n-05Ja
n-06
For
Sale
as
% o
f Fle
et
5 to 10 years24%
10 to 15 years21%
15 to 20 years25%
20 to 25 years25%
< 5 years5%
USA82%
SEASIA0%CAMERICA
5%
SAMERICA2%
EUROPE9%
Source: AMSTAT
Age Distribution
Geographic Distribution
Jets Available for Sale
Jets Available for Sale as % of Fleet
Fractional Programs Approach EquilibriumFractional Programs Approach Equilibrium
Shares bought from fractional programs less shares sold back approaching zero
New aircraft are now replacing retirements
Shares bought from fractional programs less shares sold back approaching zero
New aircraft are now replacing retirements
-50
0
50
100
150
200
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Airc
raft
Uni
ts
Bought Sold Net Capacity
-50
0
50
100
150
200
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Airc
raft
Uni
ts
Bought Sold Net Capacity
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Cap
acity
Req
uire
d by
Fra
ctio
nal P
rogr
ams
(Cum
lativ
e Si
nce
1997
)
-5%
15%
35%
55%
75%
95%
115%
135%
155%
175%
Ann
ual G
row
th R
ate
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Cap
acity
Req
uire
d by
Fra
ctio
nal P
rogr
ams
(Cum
lativ
e Si
nce
1997
)
-5%
15%
35%
55%
75%
95%
115%
135%
155%
175%
Ann
ual G
row
th R
ate
Fractional Programs are ImprovingFractional Programs are Improving
Source: AMSTAT
-30
-20
-10
0
10
20
30
40
50
60
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Net
Airc
raft
Shar
es
NETJETS FLIGHT OPTIONS FLEXJET CITATION SHARES
2005 looks like it may have been the bottom in terms of overcapacity
FlexJet and Flight Options have both improved
2005 looks like it may have been the bottom in terms of overcapacity
FlexJet and Flight Options have both improved
Secular Shift to Lower Cost Private AviationSecular Shift to Lower Cost Private Aviation
We are in the midst of a secular shift towards lower cost private aviation
Manifestations: Fractional Programs, VLJs, Jet Cards
Manifestations: New light engines and avionics
Just as commercial aviation has become the Greyhound in the sky, private aviation will become for accessible to a broader audience
Other business models will emerge
We are in the midst of a secular shift towards lower cost private aviation
Manifestations: Fractional Programs, VLJs, Jet Cards
Manifestations: New light engines and avionics
Just as commercial aviation has become the Greyhound in the sky, private aviation will become for accessible to a broader audience
Other business models will emerge
Very Light Jets Are ComingVery Light Jets Are Coming
Impact of VLJs on market and OEMs Another source of lift or incremental lift Bridging corporate aviation and owner/operator GA
– Serving a market that is starved for innovation
Possible market size for VLJs Number of aircraft transactions in the $0.5 million to $4.0 million
range
– New or used transactions
• ~2000 Used Transactions
• ~400 New Aircraft
– Total: 2400 (20% to 40% share shift) -> 480 to 960 with mid-point of 720 Jets
Impact of VLJs on market and OEMs Another source of lift or incremental lift Bridging corporate aviation and owner/operator GA
– Serving a market that is starved for innovation
Possible market size for VLJs Number of aircraft transactions in the $0.5 million to $4.0 million
range
– New or used transactions
• ~2000 Used Transactions
• ~400 New Aircraft
– Total: 2400 (20% to 40% share shift) -> 480 to 960 with mid-point of 720 Jets
Merrill Lynch Business Jet ForecastMerrill Lynch Business Jet Forecast
-200400600800
1,0001,200
2000
2001
2002
2003
2004
2005
2006
E20
07E
2008
E20
09E
2010
E
Bus
ines
s Je
t Del
iver
ies
Business Jet Forecast 2003 2004 2005 2006E 2007E 2008E 2009E 2010E
Cessna 195 179 249 304 377 440 475 465 Bombardier 89 128 186 210 202 191 180 180 Gulfstream 74 78 89 111 127 130 111 104 Raytheon 98 115 153 161 180 180 180 170 Dassault 48 60 51 65 85 95 80 70 Embraer 13 13 14 27 24 49 109 149
Total, business jets 517 573 742 878 995 1,085 1,135 1,138 Yr/Yr Change % 10.8% 29.5% 18.3% 13.3% 9.0% 4.6% 0.3%Total, business jets (excl. VLJs) 517 573 742 877 950 960 960 913 Yr/Yr Change % 10.8% 29.5% 18.2% 8.3% 1.1% 0.0% -4.9%
Investor ConsiderationsInvestor Considerations
How much better can it get? The peak is coming
International demand is sustaining the cycle Is it permanent or temporary? Is it secular or event driven? Mitigate some cyclicality?
VLJs are still not widely appreciated
New competitors in light jet market: Embraer, Honda, etc.
How much better can it get? The peak is coming
International demand is sustaining the cycle Is it permanent or temporary? Is it secular or event driven? Mitigate some cyclicality?
VLJs are still not widely appreciated
New competitors in light jet market: Embraer, Honda, etc.
ConclusionsConclusions
From an investor perspective
Equity market conditions – volatile, but aerospace has done
Regional jet market conditions and opportunities Next generation of small narrowbody jets Are scope clauses becoming irrelevant
Business jet market conditions and opportunities Secular shift to lower cost private aviation How much better can it get?
From an investor perspective
Equity market conditions – volatile, but aerospace has done
Regional jet market conditions and opportunities Next generation of small narrowbody jets Are scope clauses becoming irrelevant
Business jet market conditions and opportunities Secular shift to lower cost private aviation How much better can it get?
DisclosuresDisclosures
DisclosuresDisclosures