HEICO Corporation

HEI : NYSE : US$57.84 
BUY  Target: US$66.00

 COMPANY DESCRIPTION:

HEICO is a leading provider of commercial aerospace spare parts and repair services, as well as niche technology and electronic products for the space, defense, industrial, medical and other markets. The company reports its results in two operating segments: Flight Support Group (FSG) and the Electronic Technologies Group (ETG).

Transportation and Industrials — Airlines and Aerospace INITIATING COVERAGE WITH A BUY AND A $66 PRICE TARGET 
Investment recommendation We are initiating coverage of HEI with a BUY recommendation and $66 price target. We believe HEI will benefit from a continued “beat-and-raise” pattern, driven largely by strong 2014 commercial aerospace results. Additional acquisitions can also be positive catalysts. While PMA sales will continue to decline as a percentage of the total, commercial aerospace sales will continue to account for over 55% of estimated 2014 revenues.
Investment highlights  HEI has outperformed its initial EPS guidance by an average of 8.4% since 2005. We expect this pattern to continue in 2014. We model in Flight Support Group (FSG) segment sales up 17.2%.
 In addition to the improving fundamentals and the conservative guidance, in our view the stock will maintain its valuation premium due to the prospects of additional disciplined acquisitions, historically strong cash flows, better than industry growth, and strong execution.
Valuation We are initiating with a BUY rating and a $66 price target. Our price target is based on the average of a 31.0x EPS multiple, and a 15.5x EBITDA multiple, applied to our fiscal 2015 estimates. We believe multiples at the upper end of the range are appropriate considering 2014 upside and improving fundamentals.
Risks The key risks to our thesis on HEI include airline passenger and cargo traffic, premium passenger traffic, airline profitability, new product launches and certification, airline PMA product acceptance and certification rates, product pricing, material and fuel costs, US and international defense spending, export control restrictions and trends, economic growth, interest rates, industrial production and acquisition opportunities and timing.

WestJet Airlines Ltd. BUY

WJA : TSX : C$25.15
BUY 
Target: C$31.00

COMPANY DESCRIPTION:
WestJet is Canada’s leading low-fare airline and is based in Calgary, Alberta. WestJet employs about 6,600 full time equivalent employees, and carries roughly 15 million guests to its 71 destinations across North America and the Caribbean. WestJet is publicly traded on the Toronto Stock Exchange under the symbols WJA and WJA.a.
All amounts in C$ unless otherwise noted

Transportation and Industrials — Airlines and Aerospace
LOWER NEAR-TERM FORECAST ON FX, FUEL
BUY for EPS growth potential from initiatives
We think WestJet (WJA) looks attractive on a price-growth basis. We expect four key drivers outlined below to generate 15.9% average annual EPS growth from 2013-15. And yet, WJA trades at a reasonable P/E of 11.2x on our 2014E EPS estimate.
We expect strong EPS growth from: 1) Premium Economy launch, 2) Encore regional launch, 3) ongoing US and International growth, and 4) cost reduction initiative.
But FX and fuel headwinds could slow near-term progress
WJA estimates that its operating income is negatively impacted by $14.3 million ($0.08 EPS) for each one cent weakening of the Canadian dollar. Our new forecast assumes a $0.06 weaker Canadian dollar than our old forecast, implying a $0.42 EPS hit (hedges should help slightly).
Higher jet fuel costs also hit WJA profits by $11 million per one cent increase. We are forecasting US$0.03 higher jet fuel cost in 2014, implying a $0.18 EPS hit.
We expect WJA and other airlines (who are also hit by these factors) to put through price increases to offset these costs. But full cost recovery is likely to take time, based on our research.
Accordingly, we have reduced our near-term forecast for WJA. But our target is unchanged as we do not expect WJA’s mid-term outlook to be changed by these developments.
Good implied one-year investment return projected on moderate valuation multiple
We are projecting a 24.9% one-year return on a 5.5x EV/NTM EBITDAR (5.5x Q3/14E EV to Q4/14E – Q3/15E EBITDAR) multiple. Our target multiple is a slight increase versus WJA’s current valuation, and we think it is reasonable relative to the company’s historical valuation, sector valuations, and WJA’s prospects.

Hexcel Update

HXL : NYSE : US$42.80
BUY 
Target: US$50.00

COMPANY DESCRIPTION:
Hexcel is a leading supplier of advanced composites for
the commercial aerospace, defense, space and industrial
markets. Specific product offerings include carbon fibers,
specialty reinforcements, prepregs, fiber-reinforced
matrix materials, honeycomb, adhesives, and composite
structures.
All amounts in US$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
UPSIDE INTACT, MAINTAIN BUY AND $50 PRICE TARGET
Investment recommendation
Hexcel reported a basically in-line Q4/13. However, the lack of any upside
surprise was an excuse on a down day in the market to take profits, with
HXL down 7.0% as compared to 2.1% for the S&P 500 and 3.4% for the A&D
sector. The sell-off was overdone, in our view. Hexcel maintained its 2014
guidance and we see upside from better-than-expected execution and the
A350 ramp, which we expect will drive revenue and margin upside. We are
maintaining our BUY rating and $50 price target, and HXL remains one of
our top picks for 2014.
Investment highlights
 The company has maintained its full year 2014 outlook and we have
increased confidence in upside to the 2014 23% incremental margin
target. We currently model in a 27% target. Clearly, continued volume
growth is the key, with the A350 schedule largely driving the 2014 and
2015 performance. We see total growth of over 10%, with commercial
aerospace sales up 13%. We continue to be confident in the Industrial
and Space/Defense segments each up mid-single digits.
 We are slightly reducing our 2014 EPS estimate to $2.14 (slightly higher
tax), and raising our 2015 EPS estimate to $2.45. We are also initiating
a 2016 EPS estimate of $2.80. Seasonally, Q1/14 will be the softest due
to the spike in SG&A spend for employee compensation, but we expect
the strength of the A350 to offset the seasonal weakness in Q4/14.
Valuation
Our $50 price target is based on the average of a 22.5x EPS multiple and a
14.0x EBITDA multiple applied to our 2014 estimates. We believe HXL will
continue to justify a premium to the sector based on the secular composite
growth, better-than-expected execution, and cash deployment, and the
improving outlook for wind sales into 2014.

Air Canada BUY and FLY

AC.B : TSX : C$8.36
AC.A : TSX
BUY 

Target: C$12.00

COMPANY DESCRIPTION:
Air Canada, together with Jazz, operates an average of
1,370 scheduled flights each day and carries over 33
million passengers. Air Canada, together with Jazz,
provided direct passenger service to 158 destinations
and, through commercial agreements with other
unaffiliated regional airlines, to an additional 14
destinations, for a total of 172 direct destinations on five
continents. Air Canada trades on the TSX under the
symbols AC.A and AC.B.
All amounts in C$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
ACT 2: AC’S NEXT BIG PUSH
Building on a fabulous 2013, but risks too
2013 was a stunning year for AC investors: AC’s share price rose 323%. Is
it time to take profits or can AC’s share price appreciate much more?
We think there is near-term share price risk due to forecast risk from FX,
fuel and weather headwinds. We believe there is substantial longer-term
share price appreciation potential from AC’s three major initiatives, 1)
high-density B777s, 2) rouge, and 3) B787s.
Given AC’s strong long-term potential, we continue to recommend
investors BUY AC shares.
Major initiatives have substantial upside potential
We estimate AC’s initiatives could boost EBITDAR by $500 million or
more by 2019.
A $500 million increase in EBITDAR would generate a $9.75 increase in
our share price target, using our 5.5x EV/EBITDAR valuation multiple.
However, our outlook risk remains high for AC because 1) high degree of
uncertainty in AC’s initiatives, and 2) short-term volatility risk from
shocks (e.g., fuel, FX, weather).
Near-term forecast cut, long-term boosted
We have updated our forecast and target to reflect our new assessment of
the company’s near-term and long-term prospects.
More specifically, we have cut our Q4/13 and H1/14 forecast due to the
weak Canadian dollar, higher fuel costs and weather and boosted our
mid- and long-term outlook based on our assessment of AC’s initiatives.
Conservative valuation maintained
We have increased our valuation multiple 1.0x 5.5x EV / NTM
EBITDAR (5.5x Q3/14E EV to Q4/14E – Q3/15E EBITDAR) to reflect
the upside potential from AC’s initiatives. We believe our AC valuation
metric is in line to below the sector average, reflecting above average
outlook risk. There may be some multiple upside as AC’s initiatives are
de-risked, which we expect to occur in 2014 and 2015.

Precision Castparts

PCP : NYSE : US$268.10
BUY 
Target: US$300.00

COMPANY DESCRIPTION:
Precision Castparts is a leading supplier of investment
castings, forgings and high performance alloys, and
fasteners, metal components, and assemblies for
aerospace, defense, power generation, and industrial
applications.
All amounts in US$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
WELL POSITIONED FOR TITANIUM
REBOUND; MAINTAIN BUY, RAISING
PRICE TARGET TO $300
Investment recommendation
We believe PCP stock will be driven higher by better-than-expected
execution, reflected in industry-leading margins and cash flow, and
additional acquisitions. We believe the expected fastener acceleration in
late 2014, coupled with an improvement in titanium pricing/demand,
will contribute to synergy upside and better-than-expected execution.
We are raising our price target to $300 and maintaining our BUY rating.

Investment highlights
 Our checks indicate that the 787 fastener acceleration is on track for
H2/C14, but we are not seeing concrete evidence yet. However, we
have increased confidence in a firming of titanium demand in
H2/C14, although pricing is likely to remain pressured in near term.
 We see substantial upside to current Timet synergy estimates, based
on cost reductions and improving demand. However, it is unlikely
the company will update its 2016 $16.00 peak EPS guidance. Our
new 2014 and 2015 estimates are $12.14 and $14.17, respectively.
Valuation
Our $300 price target is based on the average of a 21.0x EPS multiple
and a 14.2x EBITDA multiple, applied to our 2015 estimates. We believe
a multiple at the upper end of the historic range is appropriate
considering the improving fundamentals, execution upside and
acquisitions.

Spirit AeroSystems BUY

SPR : NYSE : US$31.64
BUY 
Target: US$38.00

COMPANY DESCRIPTION:
Spirit AeroSystems is a leading tier-1 supplier of aircraft
fuselage, propulsion, and wing systems for commercial
and military aircraft programs. Based in Wichita, Kansas,
Spirit AeroSystems was spun out of Boeing in 2005, and
today is the largest non-OEM supplier of commercial
aircraft structures.
All amounts in US$ unless otherwise noted.

  Transportation and Industrials — Airlines and Aerospace
INCREASED CONFIDENCE IN IMPROVING CASH FLOWS;
UPGRADING TO BUY

Investment recommendationT
We are upgrading our recommendation on SPR to BUY and increasing
our price target to $38.

Our confidence in the successful sale of the Tulsa operations is increased,
and we increasingly believe new management is taking the necessary
steps to de-risk the operations and improve cash flows and program
execution. Granted there is still substantial risk associated with the
A350, contract negotiations with Boeing, and the Tulsa sale. However,
we believe the risk/reward is favorable and our confidence in
management’s strategic direction is increased
Investment highlights
 We believe the sale of the Tulsa facility will be a positive catalyst.
While Tulsa contributes ~$70M in EBITDA, it is a significant use of
cash ($210M) and a major distraction for management.
 We do expect additional charges on the A350, which won’t be a
surprise, but we believe continued improvement in execution and
reductions in the fixed cost structure will provide material tailwinds
to cash and margins in 2014.
Valuation
We are increasing our price target to $38, which is based on the average
of a 13.0x PE multiple and a 7.5x EBITDA multiple, applied to our 2014
estimates. A discount to the sector is appropriate considering the risks,
but we believe the multiple will improve as cash flow improves.

Hexcel BUY Target $50

HXL : NYSE : US$43.50
BUY 
Target: US$50.00

COMPANY DESCRIPTION:
Hexcel is a leading supplier of advanced composites for the commercial aerospace, defense, space and industrial
markets. Specific product offerings include carbon fibers, specialty reinforcements, prepregs, fiber-reinforced
matrix materials, honeycomb, adhesives, and composite structures.
All amounts in US$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
2014 GUIDANCE WILL BE HIGHLIGHT OF UPCOMING INVESTOR DAY
Investment recommendation:

Hexcel (HXL) will release its 2014
guidance at its investor conference on 12/16. We believe the initial EPS guidance will call for 10-14% EPS growth, or a range of $2.00 – $2.10.
Over the past three years, HXL has outperformed its initial full year EPS guidance by 17% on average. We believe HXL should continue to benefit from the secular and cyclical growth for composites in commercial aerospace, with the A350 providing significant late-cycle acceleration.
Wind sales should improve off the H1/13 trough, and capital deployment opportunities could provide additional catalysts. Moreover, the 777X represents longer term upside and could be a potential catalyst. We are raising our price target from $46 to $50.
Investment highlights
 While we do not expect the initial 2014 guidance to be a significant catalyst for the stock, we expect HXL to be a top performing stock in 2014. We believe the guidance will be in-line with expectations, and we are maintaining our 2014 and 2015 EPS estimates of $2.14 and $2.42.
 In terms of markets, we model in ~13% growth for commercial aerospace in both 2014 and 2015, driven largely by the 787 and the A350. Other catalysts include cash deployment (share repurchases, primarily), better than expected execution, and the 777X.
Valuation:

Our $50 price target is based on the average of a 22.5x EPS multiple and a 14.0x EBITDA multiple applied to our 2014 estimates. We believe HXL will continue to justify a premium to the sector based on the secular composite growth, better-than-expected execution, and cash deployment, and the improving outlook for wind sales into 2014.

Ducommun BUY Target $ 34

DCO : NYSE : US$26.87
BUY 
Target: US$34.00

COMPANY DESCRIPTION:
Ducommun, headquartered in Carson, California, is a supplier of aerostructures and components for commercial and military aircraft and engines, as well as a supplier of electronic assemblies and systems for commercial, military, industrial, medical and natural resources markets.

IMPROVING MARGINS AND DELEVERAGING TO DRIVE UPSIDE
Investment recommendation
We are initiating coverage of Ducommun (DCO) with a BUY rating and a $34 price target. As execution continues to improve, confidence in cash flows and debt reduction should increase, serving as positive catalysts. We believe H2/13 represents the bottom for non-A&D sales, which should provide additional upside into 2014.
Investment highlights
 While structures represent only 42% of sales, sentiment on segment margin improvement is important for DCO stock. We believe strong improvement in 2013 (100bps over 2012) and then steady improvement into 2014-2015 will be positive, demonstrating execution capabilities and success with new programs. Improved execution is also reducing the negative overhang from the 2011 LaBarge acquisition.
 DCO on track to reduce debt by ~$30M each year through 2015, which would contribute ~$0.10 to EPS. We believe the non-A&D sales will trough in H2/13, adding to the 2014 upside.
Valuation
Our $34 price target is based on the average of a 15.0x EPS multiple and an 8.0x EBITDA multiple, applied to our 2014 estimates. We believe even with the strong 2013 YTD performance (up >70%), investor interest will remain positive as execution improves.

Air Canada

Air Canada Jazz Canadair CL-600-2B19 Regional ...

Air Canada Jazz Canadair CL-600-2B19 Regional Jet C-FZAQ (Photo credit: Wikipedia)

AC.B : TSX : C$2.25
AC.A : TSX
BUY 
Target: C$5.50

COMPANY DESCRIPTION:
Air Canada, together with Jazz, operates an average of 1,370 scheduled flights each day and carries over 33 million passengers. Air Canada, together with Jazz, provided direct passenger service to 158 destinations and, through commercial agreements with other unaffiliated regional airlines, to an additional 14 destinations, for a total of 172 direct destinations on five continents. Air Canada trades on the TSX under the symbols AC.A and AC.B.
All amounts in C$ unless otherwise noted.

Recommend BUYing Air Canada (AC) for major initiatives
We have been recommending investors BUY AC for three major initiatives, which we believe will generate material profit improvement.
The initiatives include: 1) AC’s new low cost carrier, rouge, 2) five high-density B777s, which have cost benefits, and 3) cost benefits from the addition of B787s. There are also a myriad of other incremental revenue and cost initiatives.
WestJet Encore is a potential wrinkle in the AC story
WestJet’s (WJA’s) Encore regional airline could prove to be a risk to Air Canada (AC), and especially Chorus Aviation (CHR). WJA believes that Encore has considerably lower costs than AC’s regional offering, which is largely supplied by CHR. Accordingly, there is the potential for significant market share and profit loss for AC from the launch of Encore. This report assesses the downside risk potential to AC.
Our work suggests the potential profit downside from Encore is dwarfed by the potential upside from AC’s international initiatives
We estimate the potential EBIT hit to AC from Encore to be in the $55-100 million range by 2018.
AC’s three major initiatives are targeting a 15% reduction in CASM, which translates into $1.4 billion of profit improvement. We expect the related RASM impact to be a $400-500 million profit reduction and there will likely be additional profit offsets related to AC’s international efforts.
On balance, the potential upside from AC’s three major initiatives looks considerably larger than the Encore downside potential.
Normal valuation multiple
Our C$5.50 one-year target (139.1% implied ROR) continues to be based on modest EBITDAR growth and a valuation multiple of 5.0x EV/EBITDAR, which is a relatively normal multiple for the sector (sector average is 5-6x). Our valuation includes a normalized pension deficit.

Air Canada : Set To Fly ?

English: Air Canada Centre, Air Canada headqua...

English: Air Canada Centre, Air Canada headquarters, and Air Canada Boeing 777-333ER – Montreal, Quebec. It is nicknamed “La Rondelle” (“The Puck”). Français : Centre Air Canada, le siège social d’Air Canada, et un Boeing 777-333ER d’Air Canada à Montréal. Centre Air Canada a le surnom “La Rondelle.” (Photo credit: Wikipedia)

AC.B : TSX : C$2.28
AC.A : TSX
BUY 
Target: C$5.50 

COMPANY DESCRIPTION:
Air Canada, together with Jazz, operates an average of 1,370 scheduled flights each day and carries over 33 million passengers. Air Canada, together with Jazz, provided direct passenger service to 158 destinations and, through commercial agreements with other unaffiliated regional airlines, to an additional 14 destinations, for a total of 172 direct destinations on five continents. Air Canada trades on the TSX under the symbols AC.A and AC.B.
All amounts in C$ unless otherwise noted.
Transportation and Industrials — Airlines and Aerospace
INVESTOR DAY: SIGNIFICANT UPSIDE POTENTIAL BUT HIGH RISK
BUY Air Canada (AC) shares for profit growth potential We continue recommend BUYing AC shares given substantial potential upside from new initiatives including new B777s, new B787s -supplemented by cost initiatives.
Surprisingly strong capacity growth for 2014
AC guided to capacity growth of 9-10% for 2014, based on considerably more international flying. It suggests significant market share gains for AC
from its new B777 and rouge initiatives. Potential very large upside on cost side AC is targeting a 15% reduction in CASM excluding fuel and Air Canada Vacations land cost (adj. CASM) over the mid term from its initiatives from increased international flying and lower costs. We estimate this could generate more than $1.4 billion of EBIT.
Likely offset on unit revenue side A significant chunk of the CASM gains is expected to come from more long-haul flying, which has inherently lower RASM. We estimate the RASM reduction could be in the $400-500 million range.
Potential large net gain is highly uncertain Our rough calculations suggest a very large upside potential. However, the estimates assume success on initiatives, some of which are quite uncertain (e.g., rouge), and the upside from others could be offset by competitive actions. Accordingly, there is a high degree of risk to our forecast.

Forecast increased to reflect potential upside
We have increased our forecast on the CASM and capacity guidance. There may be material upside potential from AC’s initiatives. Our unchanged valuation multiple of 5.0x EV/EBITDAR is a relatively normal multiple for the sector.
Forecast

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