People of a certain age in the U.S. remember what it was like
when air travel became financially viable for the majority of the
population.
Lower airfares meant more potential passengers, more flights
and more planes. Aircraft manufacturers responded by building
planes at a feverish rate to keep up with demand.
That same dynamic is taking place now in many developing
countries in Asia, Africa and the Middle East. As the middle
class grows in these countries -- and more consumers can afford
the fares -- so does demand for air travel.
Large aircraft manufacturers are once again building planes at
a feverish rate to help meet demand, and companies that supply
gear for the aviation industry are getting pulled along in the
jet stream.
One of those companies,B/E Aerospace (
BEAV
), makes cabin interior parts for commercial aircraft and
business jets.
B/E is a leading supplier of seats, lighting systems, galley
equipment, oxygen systems and other gear to the original
equipment manufacturing (OEM) and aftermarket sectors.
Its customers include top commercial aircraft manufacturers
such asBoeing (
BA
) and Airbus as well as companies that specialize in building
business jets.
Big Beneficiary
As these manufacturers work to fill a huge backlog of global
orders for new planes, B/E has been one of the biggest
beneficiaries. The company has produced seven straight quarters
of 21% or better sales and earnings growth, and its stock price
recently spiked to nearly a five-year high.
"B/E's principle driving force has been an extended build plan
from Boeing and, to a lesser extent, Airbus," said Richard
Whittington, an analyst at Drexel Hamilton. "B/E has been
increasing its penetration inside Boeing, which has been feeding
off of international growth in business from China, India,
Indonesia, the Middle East, Africa, Central Asia and other
markets."
He says Boeing has a backlog of orders for a number of
commercial aircraft models, including the 737, 747, 757, 767, 777
and 787. That backlog should last several years.
"Aside from the 787, they are probably entering the fourth
inning in terms of filling all of the orders. The 787 is not even
out of the first inning yet," Whittington said.
The upshot for B/E is a steady stream of business -- not the
least because it is the exclusive supplier of certain parts to
Boeing and other clients.
For example, B/E earlier this year signed a deal to become the
exclusive manufacturer of modular lavatory systems for Boeing's
737 Next-Generation family of airplanes, as well as the 737 MAX.
The estimated value of the transaction was more than $800
million.
Modular lavatories allow airlines to add two to six seats to a
narrow-body aircraft.
"We believe there is a massive market for the company's
modular lavatory product, which begins shipping in late 2013,"
said J.B. Groh, an analyst D.A. Davidson.
B/E might also benefit from a recent deal Boeing signed with
Aviation Industry Corporation of China (AVIC) to develop seats,
galleys, lavatories and in-flight entertainment offerings.
"While this represents a new entrant into the interior
markets, we believe B/E's leading market share, massive installed
base and innovative design gives the company a sustainable
advantage (over competitors)," Groh noted.
Strength in the OEM market has helped offset weakness in the
aftermarket sector, he says. "Growth in oxygen systems, LED
lighting, galley inserts and lavatories should dampen top-line
volatility and dependence on what is viewed as discretionary
aftermarket spending."
Meanwhile, the market for business jets continues to rebound
from a slump that began in 2007.
"Business aviation got overbuilt in 2005 and 2006, but it is
slowly coming back and should accelerate into 2013 and 2014,"
analyst Hamilton said.
For now, B/E has plenty of work to keep it busy. The company's
booked backlog during the third quarter rose 9% year-over-year
and 1.5% sequentially to $3.75 billion.
"Backlog continues to be well-disbursed geographically," Groh
noted. "Expectations are for bookings to exceed revenue for 2013
based on large OEM backlogs and new products entering the
market."
Earnings Report
B/E posted third-quarter revenue of $766.7 million. That was
up 21% from the prior year and slightly above Wall Street
estimates. Organic revenue growth, excluding 2012 acquisitions,
was 10.5%.
The commercial aircraft business, which accounted for more
than half of the quarter's revenue, saw sales climb 16% from the
prior year to $385.6 million.
Operating earnings for the segment expanded 19% to $67.3
million.
"Our revenue growth continues to be driven primarily by the
robust new aircraft delivery cycle," Chief Executive Amin Khoury
said in a statement. "Approximately 61% of third-quarter revenues
were driven by demand for products for new-buy aircraft,
reflecting both robust new aircraft deliveries and weaker
aftermarket demand."
Earnings for the quarter rose 20% to 77 cents a share, topping
estimates for 70 cents.
Analysts polled by Thomson Reuters see B/E's full-year profit
rising 25% this year, 20% in 2013 and 19% in 2014.