J.P. 摩根-航空航天与国防行业-美国航空航天与国防：力量平衡-2019.1.18-26页.pdf

North America Equity Research18 January 2019Equity Ratings and Price TargetsMkt CapRatingPrice TargetCompanyTicker($bn)Price($)CurPrevCurEnd DatePrevEnd DateGeneral Dynamics Corp.GD US49.55165.72UWn/c193.00Dec-19n/cn/cHuntington Ingalls IndustriesHII US8.73197.12Nn/c230.00Dec-19n/cn/cLockheed MartinLMT US79.93278.80Nn/c312.00Dec-19n/cn/cNorthrop GrummanNOC US46.19264.08OWn/c318.00Dec-19n/cn/cRaytheonRTN US46.57162.84Nn/c202.00Dec-19n/cn/cSource:Company data,Bloomberg,J.P.Morgan estimates.n/c=no change.All prices as of 17 Jan 19.Aerospace and DefenseBalance of Power-January 2019Aerospace&DefenseSeth M.Seifman,CFA AC(1-212)622-Bloomberg JPMA SEIFMAN J.P.Morgan Securities LLCBenjamin E Arnstein,CFA(1-212)622-J.P.Morgan Securities LLCMichael S Rednor,CFA(1-212)622-J.P.Morgan Securities LLCAnirvan Bordoloi(91-22)6157-J.P.Morgan India Private LimitedSee page 20 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.We present our monthly Balance of Power stock rankings and trade ideas below.We also outline a few estimate changes in our defense coverage ahead of the upcoming Q4 earnings period.The Balance of Power ranking chart is in Table 4.Washington remains a problem for Defense stocks.DoD is not shut down and we believe the FY20 budget will not be dramatically different than FY19,so not much has changed for company operations or our estimates;nevertheless,Washington is not doing Defense stocks any favors.The partial shutdown highlights potential for suboptimal outcomes that no one truly wants,which is a sobering thought,given the need to surmount the FY20-21 sequestration caps.Moreover,the shutdown will delay the DoD budget request from Feb 4 to sometime TBD.We wouldnt make too much of this though.Congress was never likely to finalize FY20 Appropriations before Sept at least and regardless of what DoD requests,the final outcome depends upon administration and congressional leaders compromising on two questions:1)how big will the deficit be and 2)what is the ratio of Defense spending to non-Defense?Valuations more attractive but some metrics look better than others.Picking a bottom for Defense has been a dangerous game since the group began de-rating in April 2018 but valuations on 2020 GAAP EPS and unadjusted FCF/EBITDA are nearing levels implying either 1)an imminent budget downturn or 2)the need for meaningful downward revisions and we think neither is a base case.Investors also use pension-adjusted metrics,on which LMT,NOC,RTN,and HII look more expensive,though its important to give some credit for the net after-tax pension cash these companies will receive.It is not surprising that these adjustments figure more prominently as valuation becomes a bigger part of the Defense investment case vs fundamentals or momentum but with no widely agreed standard or readily available“adjusted consensus”,the valuation case is tougher.In Table 1 we lay out valuation on our numbers for a range of metrics.LMT ranked high for earnings momentum.Our Q4 EPS of$4.65 is Street high and LMT should have a strong 2019,with particular upside potential for both sales and margins in RMS,following up 2018 goodness in this segment.Lockheed has consistently exceeded forecasts and we now model segment EBITthat is$300 mn(5%)above the trend information released with 3Q18 earnings.(See below for estimate changes.)Of course,strong numbers did not help much in 2018 and the chief risks into Q4,we believe,are negative group sentiment that leads some to fade a good quarter,and the potential that investors are already positioned for strong results.2North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622- We rank BA high as well.Q4 earnings will highlight more company-specific developments at Boeing,and we are confident on this front,with 737 MAX deliveries up to 51 in Dec from 20/mo earlier in 2H18 and the 2018 cash from ops guide looking very achievable at$15.0-15.5 bn.We expect an initial FCF guide in the$14.0-14.5 bn range,below our$15 bn,but we assume Boeing wants to start 2019 more conservatively in light of development risk(777X)and production ramp risk(737 MAX).We rank SPR in the middle of our list.The stock has rallied 15%since announcing its deal with Boeing on Dec 27(vs 6%for the market)and we view this as the main relief rally near term,as we assume that estimates will not move materially higher on the back of the deal.The agreement provides$100 mn of annual 787 cash relief in 2019-20 but we see potential for higher capex as well as a working capital headwind in 2019.The current FCF estimate for 2019 is 7.7%of sales,near the midpoint of mgmts7-9%target range and we think 8%is a likely starting point.Poor sentiment and big questions on HII lead us to rank it high.Preliminary pension adjustments in Q3 sent the stock tumbling and the pension cash profile in the out-years will now be a focus area for investors.Pension cash is 40%of FCF in 2019 and we assumewith little visibilitythat it falls to near-zero over 5yrs,so the pace of this decline is top of mind.The market will also focus on the financial impact of the recently negotiated two-carrier buy.This should be positive but the$4bn in cost saves the press has reported could be a challenge for Newport News margins vs prior expectations($2.5bn).We think sentiment is weak,however,and expectations low with the stock trading below defense peers on most metrics and so we take a risk into earnings and rank HII high.Feeling OK on bizjets into earnings,despite Embraer miss.Macro worries are a concern about bizjets but Ascend shows a stronger than expected Q4 at Gulfstream(GD)and in-line deliveries at Cessna(TXT).With regard to demand momentum,which is most important,we do not see either GD or TXT changing tone dramatically.More quantitatively,it will be hard for either OEM to grow backlog,given elevated deliveries and so we will evaluate the results in that context.(We estimate 44 deliveries at Gulfstream and 59 at Cessna.)Moving beyond earnings,we will seek to gauge the implications of Embraers delivery miss and lackluster 2019 guidance for overall demand.We gauge that sentiment is fairly negative for both GD and TXT this month,which is why we rank them in the top and middle of our list,respectively,despite bizjet risk.Bombardier wont report until mid-Feb and we think delivering on Q4 numbers and addressing 2020 financing requirements are the most important issues there.Crunch time at ARNC.As we wrote recently(here)our base-case is that ARNC and Apollo reach a deal to privatize,with Elliott rolling its equity stake into the new entity while taking ownership of the Grenfell-fire-exposed BCS business.Without a takeout,Arconic faces the next leg of the narrowbody engine transition,and will need to guide investors on 2019,which could mean areset vs.consensus est.of$1.56 EPS($1.52 JPM).With a$21-22/sh takeout price according to recent press reports(10%upside)and the potential to drop to the mid-teens with no deal,the risk/reward favors staying on the sidelines.We performed in-line last period.Our weighted picks gained 0.5%in Dec/Jancompared to an unweighted average up 0.4%.Our top three stocks ARNC/NOC/SPR returned-0.5%/2.5%/3.6%respectively with our bottom picks TXT declining 5%,TDG up 1.5%and KAMN up nearly 10%.3North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-Estimate Changes Raising LMT estimates modestly.We are boosting our segment EBIT estimates for Lockheed after good performance YTD that should carry into 2019.Lockheed has consistently outperformed our segment ops estimates by$150-200 mn each quarter in 2018.Looking to 2019,guidance calls for just$150 mn of y/y improvement despite strong growth in MFC and Aeronautics and so we assume$300 mn.NOC cash flow coming down a touch in 2019.We are reducing our Northrop FCF estimates modestly,$100 mn in 2019,to better reflect Orbital working capital benefit in 2018 that presents a headwind in our cash flow bridge(See Table 1.)We could see a conservative guide out of the gate new CEO Kathy Warden.Modifying GD estimates for good Q4 deliveries,more GDIT caution in 2019.With an extra G650 and two G550s,the 44 deliveries Ascend are three above our prior estimate of 41.This adds$20mn in EBIT into 4Q,offset by modest other tweaks to our model including lower Marine growth.Our 4Q est.is up to$3.04 and our FY18 est.is$11.20.We made small changes to our 2019 segment growth forecasts,most notably taking growth down 1%in Marine and 2%in GDIT,offset by higher EBIT at Gulfstream off a higher 2018 base.Net-net,2019 EPS is down 10c to$12.15 but this is still above the consensus,which is down 10c since the start of Dec.Discount rates and asset returns will weigh on FAS/CAS adjustments.Since we last heard from our defense companies at 3Q18 earnings,we estimate that discount rates have fallen 15bp while pension asset returns are likely down 1-2%.These present modest headwinds to the non-cash FAS/CAS adjustment in 2019 and you can find them in Table 2.Northrop moved to MTM pension accounting in early December and gave updated guidance at that time and so our calculations for the company are between Dec 10th and year-end.4North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-Table 1:Defense Co.Valuation Metrics2019E2020E2021EFCF/shGD13.8x12.5x11.3xHII11.6x11.7x10.8xLMT 13.1x13.2x12.2xNOC 16.4x12.8x11.3xRTN 14.2x12.0 x10.8xAverage13.8x12.4x11.3xFCF/sh ex Pension2019E2020E2021EGD13.8x12.5x11.3xHII16.0 x14.6x12.6xLMT 19.7x19.1x14.0 xNOC20.3x14.6x12.7xRTN 23.1x18.0 x14.7xHRS/L315.5x12.3x10.7xAverage18.1x15.2x12.7xGAAP EPS2019E2020E2021EGD13.5x12.2x10.9xHII11.8x11.4x11.5xLMT13.9x10.8x10.1xNOC13.4x11.5x10.4xRTN13.4x11.7x10.7xAverage13.6x11.6x10.5xPAEPS2019E2020E2021EGD13.5x12.2x10.9xHII16.0 x14.5x13.2xLMT17.3x15.8x14.6xNOC19.2x15.9x14.1xRTN16.4x14.8x13.2xHRS/L315.5x13.2x11.9xAverage16.6x14.7x13.2xSource:J.P.Morgan estimates,Bloomberg.Note:PAEPS is Pension Adjusted EPS.Table 2:Northrop FCF Bridge2018E2019E2018E FCF$2,675 Pre-tax ItemsSegment EBIT$3,470$3,979$509 Pension$660$670$10 Total Pre-tax$4,130$4,649$519 After-tax$3,304$3,719$415 WC and CapexOrbital Working Capital($200)Capex($1,086)($1,200)($114)Total WC and Capex($314)Build$2,776 Published 2019E Est$2,772 Source:J.P.Morgan estimates.5North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-Table 3:Pension FAS Adjustments2019 FAS Guidance*based on discount rates based on asset returnTotal Updated FASEPS ImpactLMT($1,065)($80)($32)($112)($1,177)($0.31)NOC$500($14)($25)($39)$461($0.18)RTN($1,150)($48)($38)($86)($1,236)($0.25)HII($73)($15)($10)($24)($97)($0.46)Source:J.P.Morgan estimates.6North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-Balance of Power Explained The total number of points in our coverage universe is 100 times the number of stocks.Our intent with the Balance of Power is to communicate nuance,such as conviction level and the impact of near-term catalysts.Table 4:J.P.Morgan Aerospace/Defense Balance of Power Rankings(Prices as of January 17,2019)CompanySymbolRatingPointsPriceNotesLast BoPDeltaLockheed MartinLMT N140$278.00We expect a strong Q4 with positive operating revisions likely10040BoeingBAOW135$359.09Expect strong Q4 cash flow,satisfactory 2019 guide10530Huntington IngallsHIIN130$197.12Q4 could help clarify cash flow outlook 100General DynamicsGDUW125$165.72With sentiment weak,we could see guide reducing risk 8540Northrop GrummanNOC OW120$264.08We think cash flow headwinds understood by now 130-10Spirit AeroSystemsSPR N115$78.03Recent outperformance and appropriate 2019 expectations put SPR in the middle of our list 125-10TransDigmTDGUW110$349.05Will not report until Feb,but ESL deal could close soon-ish 7040TextronTXT OW105$48.62We think expectations are low 7530Triumph GroupTGI N100$13.69Investor expectations appear well calibrated for Q3955RaytheonRTNN95$162.84Expect little change to outlook post Q4 earnings 905Mercury SystemsMRCY OW90$48.34Our expectations are in line 8010HarrisHRSOW85$138.65With focus on deal,earnings looks like a less important catalyst 115-30L3 TechnologiesLLLOW80$178.00With focus on deal,earnings looks like a less important catalyst 110-30KratosKTOSN75$14.15Removing some points after strong performance;may not report Q4 until late Feb120-45BombardierBBD/BOW70C$2.08Next catalysts likely earnings and addressing 2020 debt 100-30ArconicARNCN65$20.18Risk/reward moving to downside as stock prices in deal 135-70Kaman CorpKAMNN60$58.96Not clear foreign fuze sale has moved forward 65-5Total1,700 Source:J.P.Morgan estimates,Bloomberg.Note:These point allocations reflect our short-term views.For our long-term outlooks and ratings,please see the investment thesis section of our latest company research,which can be found on http:/.7North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-Figure 1:Last BoP Total Return(12/7/18 1/17/19)Source:Bloomberg.BAKAMNKTOSSPRNOCTDGAero/DefS&P 500MRCYGDLLLHRSARNCRTNLMTTXTBBD/BTGI-10%0%10%20%8North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-Table 5:Upcoming Catalyst CalendarCurrent BoP23-JanUTX Q424-JanTXT Q429-JanLMT Q429-JanHRS Q2+LLL Q429-JanMRCY Q230-JanBA Q430-JanGD Q431-JanNOC Q431-JanRTN Q4(Est)1-FebHON Q4Next BoP5-FebTDG Q1(Est)6-FebSPR Q4(Est)7-FebTGI Q4(Est)14-FebBBD/B Q414-FebHII Q4(Est)February?FY20 Defense Budget RequestLate FebKAMN Q4(Est)Late FebKTOS Q4(Est)Source:Company reports,Bloomberg,and J.P.Morgan estimates.9North America Equity Research18 January 2019Seth M.Seifman,CFA(1-212)622-J.P.Morgan Aerospace/Defense Comp Sheet(Prices as of January 17,2019)SharesMarketEPSP/EEV/EBITDAEV/SalesP/FCFPriceImpliedCompanyPriceSymbolRatingOutCap(bn)CY18ECY19ECY20ECY18ECY19ECY20ECY19ECY20ECY19ECY20ECY19ECY20ETargetUpsideAerospace/IntegratedArconic$20.18ARNCN502.410.11.341.521.8015.0 x13.3x11.2x7.0 x6.4x1.1x1.0 x24.4x15.2x$229%Boeing$359.09BAOW580.8208.615.2518.7521.5023.6x19.2x16.7x13.3x12.3x2.1x1.9x13.4x12.8x$40011%BombardierC$2.09BBD/B CTOW2624.94.10.130.100.2812.5x16.2x5.7x8.2x5.1x0.7x0.5x28.1x6.6x$5.00139%Kaman Corp$58.96KAMNUW28.31.72.553.804.0523.1x15.5x14.5x9.9x9.9x1.0 x0.9x12.8x18.0 x$590%Spirit AeroSystems$78.03SPRN106.18.36.247.408.8012.5x10.5x8.9x8.0 x7.0 x1.3x1.1x12.1x10.4x$9015%Textron$48.62TXTOW249.412.13.203.404.1015.2x14.3x11.9x9.2x8.6x1.0 x1.0 x15.1x12.4x$5819%TransDigm$349.05TDGUW55.619.415.5716.8218.5822.4x20.7x18.8x14.7x13.8x7.6x6.8x20.7x19.1x$40015%Triumph Group$13.69TGIN49.60.72.031.682.016.8x8.1x6.8x10.0 x12.1x0.7x0.6xNM9.2x$2046%Average/Total:$265.016.4x14.7x11.8x10.0 x9.4x1.9x1.7x16.4x13.0 xDefenseGeneral Dynamics$165.72GDUW299.049.611.2012.1513.4014