June 22, 2016: Our weekly synopsis of select analyst notes point to increasing fuel costs and weak wide-body demand, among other things, as issues to consider.
Weekly Insight, June 20, 2016
|The volatility of Zodiac (ZC-PAR; NR) shares was likely due to recent press reports that Safran (SAF-PAR; NR) was making a bid for the company – shares gained ~27% at one point. SAF-PAR denied the rumors, however ZC-PAR shares still finished up ~12% on the day. In its 3Q16 sales call on Wed., ZC-PAR noted continued difficulties with A350 lavatories and reiterated its guide for seat production to get back on track in 18 months, implying further risk to Airbus’s delivery expectations for 50 A350s this year. In a further concern to investor ZC-PAR also noted lower revenue due to lower biz jet and helicopter sales.|
Press reports indicate BA will sell 100 aircraft to Iran. However, the deal isn’t quite done – Treasury approval still has to be granted and there is some in Congress who are raising concerns. The main issue to us will be how many widebodies Iran orders. Of BA’s 275 orders YTD only 25 are widebodies. If BA does not achieve significant widebody orders from Iran, Farnborough, or elsewhere, we see downside risk to 777 production rates and to the last 787 production ramp to 14/mo.
Crane, Hold, June 17, 2016
We recently spent two days with Crane (CR) in the Midwest. While the focus remains on the near-term outlook for the Fluid Handling (FH) segment, we believe the stock is incrementally more attractive due to the increased contribution from the Payment and Merchandising Technologies (PMT) and Aerospace & Electronics (A&E) segments, and the relatively strong market positions in each segment. However, we believe much of the recent strength in the stock is due to the rise in oil prices, and we would caution that the fundamental outlook for the FH segment has not materially changed. We are maintaining our HOLD rating and our $60 price target, as we see near-term risk around oil prices and the outlook for the core valve business, but we have greater confidence in the longer-term upside to margins based on conservative incremental expectations and superior execution.
Weekly Insight, June 20, 2016
The stocks came under pressure again last week as estimates are being revised lower to account for higher jet fuel costs and lower 2Q unit revenue estimates. We believe shares are oversold and believe United and Southwest investor updates tomorrow and Thursday could act as a catalyst for the group.
Sentiment within the group continues to remain challenged as estimates are moving lower to reflect higher jet fuel and slightly worse than expected unit revenue for 2Q16. We lowered our estimates several weeks ago, and considered it fairly obvious that numbers needed to come down. Indeed, we believe the stocks are pricing in not only no y/y 2H16 unit revenue improvement but further pressure on pricing.
Monthly Dispatch, June 21, 2016
We estimate global traffic growth was 4-5% in May, still solid, though the pace has slowed. We estimate that traffic growth is now 5%+ through five months, adjusting for the leap year. This is in line with the long term trend but below the 6-7% we saw through much of 2015 and as a result, IATA has revised its 2016 forecast down to 6.2% from 6.9%. In 2015, growth averaged 6.1% for 1H and 6.9% for 2H, with tougher comps suggesting another downward revision is possible. Recent deceleration has been most prominent in Europe, where we estimate only 1-2% for April and May. With vocal concerns about capacity growth and yield pressure plus the impact of the Brussels terror attacks, Europe could remain a drag. North America has slowed as well to an estimated 2-3% for March-May and with average growth of 5.4% in 2H15, the region could be a headwind for the rest of the year as well. Meanwhile, Asia/Pacific, which contributes more to traffic and traffic growth than any other region, is holding up, particularly China, which accounts for ~1/3 of Asia/Pac traffic. We estimate Chinese growth was 14% in May, roughly in line with the pace YTD.
Widebody demand remains muted. YTD, Boeing has combined net orders for 25 current generation 777s and 787s, behind the pace of 100+ per year for 2014-15, which yielded book-to-bill ratios of ~0.5x. Management has spoken openly about slowing widebody demand and responded by reducing 777 delivery expectations from 2016’s ~100 aircraft to ~66 in 2018. A larger 787 backlog underpins the recent production increase to 12/month but we won’t see a full 144 deliveries until 2018 due to the 787-10 ramp and plans for 14/month by decade-end remain unlikely to pan out, in our view. There could be widebody orders coming, though we do not expect a broader resurgence in demand. Carriers considering new widebodies, according to press reports, include Emirates, Oman, Saudia and Virgin Atlantic, and we would note the prevalence of airlines from the Middle East, where load factors are falling and yields face pressure. In addition, the 100 aircraft that Iran will order from Boeing will reportedly include some 777-300ERs and we could see more 777s and/or 787s from China as well.
Below the Radar, June 20, 2016
China’s three largest airlines–China Southern, China Eastern, and Air China–reported aggregate traffic growth of 9.9% y/y on capacity growth of 10.4% y/y for the month of May. These growth rates are about in line with the double-digit YTD 10.5% / 11.2% figures, respectively.
Spirit Aerosystems (Outperform), June 21, 2016
737 Programs Still The Most Important. In 2015 the 737 program (fuselage + nacelles + pylons + wings) accounted for 48% of Spirit’s sales and a larger portion of profits/cash flow. We remain confident there is sufficient demand to support Boeing’s 2017 planned 12% increase to 47/mo from the current 42/mo, and somewhat confident in 2018’s planned 11% increase to 52/mo. However, our recent analysis suggests that without an improving world GDP growth outlook and/or above-average rates of aircraft retirement, achieving 2019’s planned 57/mo appears to be challenging.
787: We estimate the 787 is SPR’s #2 platform representing ~20% of sales. Boeing moved to 12/mo from 10/mo, and until recently we expected another increase to 14/mo over the next few years. However, with Boeing’s firm May-end 787 backlog at its lowest level since 2007, coupled with a generally soft widebody market, we think an increase to 14 for SPR is several years away. We expect SPR’s discussions with Boeing on the 787-9/787-10 pricing and the profit margin on the next accounting block will continue to be focus areas for investors.
777: We estimate the 777 (fuselage + nacelles + pylons + wings) generates ~15% of Spirit’s sales. Through May, Boeing booked only 12 777 orders – below the pace needed to bridge the transition to the 777X without further rate reductions beyond the scheduled 8.3/mo-to-7/mo cut in 2017. SPR should see less of a revenue fall off as Boeing 777 deliveries decline to 5.5/mo in 2018 because SPR would continue to deliver at 7/mo as it delivers 777 and 777X parts.
A350. Investors may focus on Airbus’ recent comment that it will “struggle” to meet its 2016 delivery target of 50 A350s due to cabin supplier delays, but we do not believe the supply chain production rates have changed.