瑞信-美股-航空航天与国防行业-2019年美国商业航空航天展望-2019.1.22-59页.pdf

DISCLOSUREDISCLOSURE APPENDIXAPPENDIX ATAT THETHE BACKBACK OFOF THISTHIS REPORTREPORT CONTAINSCONTAINS IMPORTANTIMPORTANT DISCLOSURES,DISCLOSURES,ANALYSTANALYST CERTIFICATIONS,CERTIFICATIONS,LEGALLEGAL ENTITYENTITY DISCLOSUREDISCLOSURE ANDAND THETHE STATUSSTATUS OFOF NONNON-USUS ANALYSTSANALYSTS.USUS DisclosureDisclosure:Credit Suisse 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.S:/IMAGE LIBRARY/2015-03-04 CS Equity Research Template.pptx Credit:Staff Sgt.Stephany Richards via Wikimedia Credit Suisse Equity Research Americas/United States Aerospace&Defense 2019 Commercial Aerospace Outlook Seventh Inning Stretch Including the Results of our Latest Buyside Survey January 22,2019 Robert Spingarn+1.212.538.1895 robert.spingarncredit- Joe Caiado+1.212.325.6771 jose.caiadocredit- Audrey Preston+1.212.325.2709 audrey.prestoncredit- Scott Deuschle +1.212.325.6116 scott.deuschlecredit- Table of ContentsTable of Contents I.Executive Summary II.Sector Performance III.Commercial Aerospace IV.General Aviation(Bizjet and Rotorcraft)V.Buyside Survey Results VI.Company Snapshots *Our target price changes are outlined in our note 2019 Commercial Aerospace Outlook 2 OverviewOverview Executive Summary:Our View on 2019Executive Summary:Our View on 2019 CommercialCommercial OEOE:VisibilityVisibility remainsremains goodgood.Overall,we remain constructive on OE-driven names,though we are more mindful of slowing traffic growth amid a more fragile macroeconomic outlook.That said,slowing traffic typically impacts aftermarket before OE.Therefore,we favor names with higher OE mix,and particularly those with higher OE profit mix.Multi-year backlogs remain intact,and order activity is still robust which should insulate production rates and cash flows from any brief,economic slowdown in 2019 or 2020.However,a more severe economic correction would be expected to pressure multiples even as EPS/FCFs largely hold up(as in 2008/09).Our top pick is Boeing,which benefits from both the macro backdrop described above(2018 b:b of 1.1x)with further support from a compelling micro(rising margins/strong CFs)story,and a shareholder-friendly capital return plan.Further,we expect fewer supplier disruptions to impact the 737 rate hike to 57/mo,as the transition from NG to MAX is nearly complete.SuppliersSuppliers:MostMost areare moremore sensitivesensitive toto traffictraffic growthgrowth.2019 could be a more mixed year for suppliers,especially if traffic growth slows enough to pressure aftermarket volume growth.That said,we still expect strong results in H119 driven by the continued release of pent-up maintenance demand.However,this tailwind could wane over the course of the year,compounded by lower growth in the addressable market.We expect the number of planes coming off of warranties to expand at a slower rate,while retirements will likely pick up to compensate for a hiatus in 2018,taking aircraft out of the addressable market.BizjetBizjet:StableStable atat higherhigher ratesrates.We expect deliveries to accelerate in 2019,led by a book:bill 1.0 x in 2018 and multiple new model introductions(Global 7500,G500/600,Citation Longitude,Praetor 500/600).However,the modest demand inflection may not be sustainable given global economic uncertainty,and any fade from 2018s tax reform catalysts.We also downgrade ERJ in conjunction with our 2019 outlook following its recent investor day(more detail can be found in our note Executive Dis-order;Downgrade to Neutral).RotorcraftRotorcraft:StableStable atat lowerlower ratesrates.Though OEMs are diversifying into other end markets(civil government,search and rescue),we do not anticipate a meaningful recovery until oil and gas markets stabilize and offshore drilling activity accelerates.3 Traffic growth bears watching,causing us to favor OE over aftermarket and bizjet Traffic growth bears watching,causing us to favor OE over aftermarket and bizjet OverviewOverview -60%-40%-20%0%20%40%60%80%1/1/20091/1/20101/1/20111/1/20121/1/20131/1/20141/1/20151/1/20161/1/20171/1/2018DefenseGovt ServicesCommercial OEMsCommercial SuppliersS&P 50020092009-2018 Sector Performance 2018 Sector Performance Commercial Aero had a divergent year in 2018.Suppliers relatively outperformed,spearheaded by resilient performances from TDG(+22%),HEI(+27%),and ESL(+63%as a result of TDGs takeout bid).SPR(-19%)and TGI-56%)both faltered on execution concerns.Meanwhile,OEMs lacked a unifying theme:trade pressures weighed on BAs(+7%)meteoric performance,while ERJ (-8%)was range bound on account of the pending BA deal.BBD(-34%)struggled to gain traction after selling the CSeries to Airbus,while greater-than-expected working capital burn spooked investors.Looking ahead to 2019,we think the group will trade more holistically as macro concerns come to the fore.Absolute Performance of Sector by End Market,Rebased at Beginning of Each YearAbsolute Performance of Sector by End Market,Rebased at Beginning of Each Year 4 OverviewOverview 200720082009201020112012201320142015201620172018S&P 5004%-37%25%13%0%4%29%13%0%10%20%-7%Defense26%-29%13%-6%-6%14%60%19%8%22%35%-20%Govt Services3%14%-0%-6%-14%-11%17%14%15%21%15%3%Commercial OEMs29%-53%28%20%-11%9%41%4%-19%13%43%-13%Commercial Suppliers45%-43%46%36%11%5%47%6%-8%17%24%-2%Mixed performance in 2018,largely on account of idiosyncratic factorsMixed performance in 2018,largely on account of idiosyncratic factors Source:FactSet;CS Research 5 Commercial OECommercial OE CycleCycle concernsconcerns weighweigh onon 20192019;expectexpect multiplemultiple compression,compression,thoughthough limitedlimited financialfinancial impactimpact in in nearnear termterm WeWe viewview slowingslowing airair traffictraffic asas thethe mostmost importantimportant metric,metric,asas otherother indicatorsindicators (oil,(oil,rates,rates,orders)orders)havehave hadhad mixedmixed effectseffects ofof latelate.Credit:Airbus S.A.S.via Creative Commons Catalyst CalendarCatalyst Calendar 6 TopicTopic Expected DateExpected Date EventEvent NMA Feb 2019 March 2019 June 2019 Final engine selection Authority to offer Potential launch Paris Air Show 737 Rate Hike Mid-2019 Suppliers ramping early 2019 787 Rate Hike YE2019 BA/ERJ deal Early 2019 YE2019 Government approval Deal expected to close BBD divestitures H12019 Sales of Q400 and bizjet training portfolio 777X EIS Q219 First flight;certification and delivery expected in 2020 Commercial OE Commercial OE Macroeconomic Outlook(Aftermarket)Macroeconomic Outlook(Aftermarket)Though macro concerns have been top of mind recently,we think the market has already largely priced in the impact of slowing traffic growth.Since 2000,commercial aero stocks have experienced three periods of significant multiple compression.Suppliers have generally tended to weather downturns more gracefully than OEMs,troughing at higher P/E multiples losing 8.4x,on average,and recovering sooner because they are earlier-cycle businesses.Given that aftermarket names have already pulled back 8.7x,we expect downside to be somewhat limited,though suppliers are more vulnerable from slowing aftermarket growth and BAs Partnering for Success initiatives.7 0510152025303540Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14Jul-14Jan-15Jul-15Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Average Aftermarket P/EBoeing P/E-12.2x-5.0 x-15.4x-21.2x(-14.7x ex initial drop)At least-6.5x from 787 execution issues-4.7x-6.9x-8.7x-8.1xCommercial OECommercial OE Multiples in the trenchesMultiples in the trenches *Aftermarket composite consists of AIR,HEI,MOGa,TDG,and WWD Source:FactSet,Credit Suisse estimates Macroeconomic Outlook(Boeing)Macroeconomic Outlook(Boeing)This time around,we believe BA is somewhat less vulnerable to cyclical weakness,both relative to history and to its suppliers.Its multi-year backlog should allow the company to maintain production rates,while its push into services mitigates cyclical exposure,though BGS is not yet large enough to fully offset.Meanwhile,BAs PFS initiatives are slowly allowing the company to gain leverage and capture a greater degree of aftermarket revenue.Deliveries proved remarkably resilient through the last downturn,though production rates are higher today,so some risk is present.Still,importantly,we note that the sharp 80%share pullback in 2007-2009 was due in part to the manufacturing meltdown on the 787.These issues were ongoing to some extent before the Great Recession hit,and we attribute at least 6.5 turns of multiple compression to the turmoil(see previous slide).Excluding that impact,Boeing has suffered an average 11.2 turns of multiple compression in the last three downturns.8 Deliveries keep on rollingDeliveries keep on rolling 01002003004005006007008009001,000198019821984198619881990199219941996199820002002200420062008201020122014201620182020E2022ECommercial OECommercial OE Boeing Deliveries Over Time Source:Company data Traffic Expected to Decelerate,But Remain Elevated Traffic Expected to Decelerate,But Remain Elevated vs.Longvs.Long-Term TrendTerm Trend Traffic growth has taken center stage as investors are beginning to worry that recent blockbuster expansion is beginning to slow(+8.0%in 2017,+6.6%YTD 2018).IATA is expecting growth of 6%in 2019,though we note its history of conservatism(see below).This 6%figure remains above the 5-5.5%historical trend,which is generally regarded as a benchmark for expansion.9 Commercial OECommercial OE 0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%2013201420152016201720182019Traffic Growth-IATA ForecastsTraffic Growth-ActualAverage discrepancy:1.0%Slow down,you move too fastSlow down,you move too fast Source:IATA Traffic:APAC Outlook Weighs on Global GrowthTraffic:APAC Outlook Weighs on Global Growth However,we think some caution is warranted,as traffic growth reverts to the mean,and IATA reports that airline CFOs have become less positive on future air travel and air cargo growth.While the IATA forecast is generally neutral for North America and Latin America,Europe and Asia are expected to decline.APAC has been an important driver of global traffic growth,accounting for over a third of passengers.Growth in this region slowed to a greater degree than globally in 2018,and a broader macro slowdown in China could weigh on air traffic into 2019.10 China,China,ChinaChina,China,China 0.0%2.0%4.0%6.0%8.0%10.0%12.0%20112012201320142015201620172018E 2019FGlobalAsia/PacificHistorical Average0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%20112012201320142015201620172018E 2019FAfricaAsia/PacificEuropeLatin AmericaMiddle EastNorth AmericaGlobalCommercial OECommercial OE Source:IATA Interest Rates and Credit EnvironmentInterest Rates and Credit Environment In a rising rate environment,financing new aircraft is relatively more expensive,so airlines may choose to increase utilization of existing aircraft rather than purchase new ones.However,we expect other costs(labor and fuel)will continue to dominate the investment calculus for airlines.Historically,orders have peaked as spreads turn negative as recessionary fears mount.For airplanes on the margin in a tightening credit environment,this could potentially manifest in higher internal financing from the OEMs.11 0.005.0010.0015.0020.0025.0002004006008001000120014001600Jan-59Feb-61Mar-63Apr-65May-67Jun-69Jul-71Aug-73Sep-75Oct-77Nov-79Dec-81Jan-84Feb-86Mar-88Apr-90May-92Jun-94Jul-96Aug-98Sep-00Oct-02Nov-04Dec-06Jan-09Feb-11Mar-13Apr-15May-17TTM Deliveries(RHS)Fed Funds Rate(%,RHS)Correlation:0.56Commercial OECommercial OE Order activity resilient to rising ratesOrder activity resilient to rising rates 0500100015002000250030003500-8.00-6.00-4.00-2.000.002.004.006.00Dec-59Jan-62Feb-64Mar-66Apr-68May-70Jun-72Jul-74Aug-76Sep-78Oct-80Nov-82Dec-84Jan-87Feb-89Mar-91Apr-93May-95Jun-97Jul-99Aug-01Sep-03Oct-05Nov-07Dec-09Jan-12Feb-14Mar-16Apr-18Trailing 12-mth Net OrdersSpreadSource:Company data,FlightGlobal,FactSet Retirements Lagged in 2018;Expect ReboundRetirements Lagged in 2018;Expect Rebound Retirements have historically served as driver and a leading indicator for orders,as airlines seek to replace aging fleets while adding growth capacity simultaneously.However,while retirements dipped in 2018,we primarily attribute the slowdown to deferred retirements,rather than a fundamental decline in demand,as record load factors and depressed deliveries that kept older planes in the air.Accordingly,we expect retirements to tick up past the historical 2.5%trend as deliveries normalize,new capacity comes online,and airlines gain the flexibility to retire aging jets.12 Commercial OECommercial OE 0100200300400500600700050010001500200025003000350019801982198419861988199019921994199619982000200220042006200820102012201420162018Gross Orders(LHS)Retirements(RHS)Lower load factors should allow airlines more leeLower load factors should allow airlines more lee-way to retire fleetsway to retire fleets Source:Company data,FlightGlobal Boeing Delivery CadenceBoeing Delivery Cadence The supply chain meltdown over late summer appears to be abating,and deliveries have returned to Y/Y growth.Notably,accelerating MAX deliveries are more than offsetting declining NG production,and Decembers strong deliveries(51 MAXes and 18 NGs,69 total)suggest that the supply chain is adjusting to the mix shift and production ramp,and Boeing is burning down the parked inventory in Renton.We estimate BA is still 24 jets behind its delivery schedule;however,so 737 deliveries will likely remain elevated in Q119.13 Commercial OECommercial OE -40%-30%-20%-10%0%10%20%30%0100200300400500600700800JanFebMarAprMayJunJulAugSepOctNovDecCumulative Deliveries,2018 vs 201720182017Y/Y Change,Monthly DeliveriesBottlenecks appear to be easingBottlenecks appear to be easing Source:Company data Boeing Delivery CadenceBoeing Delivery Cadence Though deliveries are on an overall upward trend,intra-quarter deliveries have begun to fluctuate to a greater degree.This suggests that the company may be spending more(on overtime,expedited freight,etc.)as it makes a last-minute push to reach quarterly targets.We expect this volatility to diminish as the supply chain normalizes and component deliveries become more consistent,with a commensurate improvement in margins.14 Commercial OECommercial OE 020406080100120Jan-17Feb-17Mar-17Apr-17May-17Jun-17Jul-17Aug-17Sep-17Oct-17Nov-17Dec-17Jan-18Feb-18Mar-18Apr-18May-18Jun-18Jul-18Aug-18Sep-18Oct-18Nov-18Dec-18737 NG737 MAX747767777(ER,F)787+35%+51%+105%+84%+123%+68%+42%+79%Expect smoother deliveries in Expect smoother deliveries in 20192019 Source:Company data Backlog CoverageBacklog Coverage We view four years of