Erickson

EAC : NYSE : US$13.80
HOLD 
Target: US$17.00

COMPANY DESCRIPTION:
Erickson Air-Crane is a provider of heavy and medium-lift
air services for government and commercial customers.
Key markets include firefighting, personnel transport,
construction, and oil and gas. The company is the largest
operator, and type certificate holder, of the SH-64
Aircrane. The company is based in Portland, Oregon.

Transportation and Industrials — Aerospace and Defense
STRONG Q3/14 OVERSHADOWED BY SOFTER FULL YEAR OUTLOOK
Investment recommendation
EAC reported adjusted Q3/14 EPS of $1.22, compared to our estimate of
$0.95 and consensus of $1.01. Cash flow in the quarter was a positive
~$17M. Note that Q3 is usually seasonally the strongest quarter for EAC.
However, the company indicated that full year results would likely be at
the lower end of its guidance range, which was unchanged from prior
quarters. In the Government segment, firefighting revenues were up
12% over Q3/13, while Defense & Security revenues were down 25%
year-over-year. Much of the growth was in Infrastructure (oil and gas)
markets. We continue to see risk associated with the timing of the
commercial market ramp, while revenues in the defense segment
seemed to be declining slighter faster than we had modeled. We are
maintaining our HOLD rating and lowering our price target to $17.
Investment highlights
 The company saw a nice step-up in bill rates across markets.
However, the company indicated that Q4/14 results will drive full
year results at the lower end of the guidance range. We are
maintaining our full-year 2014 $0.46 EPS estimate.
 While there was good cash flow in the quarter, the outlook for 2015
is still about the ramp down in Government revenues, and how fast
they can be replaced by commercial revenues, specifically in oil and
gas. The company did announce a win in Ecuador, which should be
positive for 2015.
Valuation
We are lowering our price target to $17. Our price target is based on the
average of a 12.0x EPS multiple and a 5.25x EBITDA multiple applied to
our 2015 estimates

Bombardier Inc.

BBD.B : TSX : C$3.50

BUY
Target: C$5.50

 

COMPANY DESCRIPTION:
Bombardier operates in two major and roughly equally sized
segments: 1) aerospace equipment including business jets and
small airliners, and 2) rail equipment. Products are sold and
manufactured on a global basis.
All amounts in C$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
BT PRESIDENT MEETING AND EUROPEAN TOUR
BUY for margin expansion potential, new products
We continue to recommend BUYing Bombardier (BBD) due to 1)
surprisingly good CSeries order flow at the Farnborough air show, 2)
increased focus on improving profitability at Bombardier Aerospace (BA),
and 3) margin improvement potential from the weak Canadian dollar.
BT continues to hold potential
BBD held an investor trip to Europe this week. Key stops included a
meeting with Bombardier Transportation (BT) President, Dr. Lutz Bertling
and plant tours of BT’s largest facility, Henningsdorf, and the Bombardier
Aerospace (BA) CSeries wing plant in Belfast. Takeaways include:
 BT sales growth looks positive. Growth should be in the 5-10% per
year range for the next 3 years, and 3-5% per year thereafter;
 BT still believes 8% EBIT margins are quite possible, which would
be a big pickup from the 6% targeted for 2014;
 The CSeries continues to progress, with production wings moving
through the Belfast plant. Belfast’s composite technology also
appears impressive and proprietary.
Forecast bumped on BT sales discussion; target bumped on forecast
The BT sales guidance was higher than we were projecting, so we
increased our forecast to be in line with the growth rates outlined by
management. Our target increased on our new forecast.
Valuation maintained at a premium level
We are maintaining our valuation multiple at 9.0x EV/NTM EBITDA in
one year (9.0x Q2/15E EV to Q3/15E – Q2/16E EBITDA). Our valuation
remains at a premium level, reflecting the significant EPS growth
potential from BBD’s new product and other opportunities.

 

T-Mobile US BUY Target Price $39

TMUS : NYSE : US$28.49
BUY 
Target: US$39.00

COMPANY DESCRIPTION:
The fourth largest wireless carrier in the US by
subscribers, T-Mobile US was established with the merger
between MetroPCS and T-Mobile USA, formerly a unit of
Deutsche Telekom. The company is majority owned by
Deutsche Telekom and is headquartered in Bellevue,
Washington.
All amounts in US$ unless otherwise noted.

Telecommunications
ON THE ROAD WITH MANAGEMENT;
ADD MOMENTUM CONTINUES; BUY
Investment recommendation
Our two-day non-deal roadshow in the Midwest served to solidify our
view that the company’s dynamic, aggressive pricing strategy is
continuing to drive postpaid add share. While the focus on the margin
seems to have shifted from lowering prices as part of the Un-carrier
strategy to offering more data at the same prices with targeted
promotional activity highlighting network quality, strong momentum
continues as evidenced by management’s disclosure earlier this month
of 552k postpaid and 208k prepaid net adds in August alone. These
results suggest upside to our Q3/14 estimates of 580k and 106k,
respectively. Management also discussed a number of key industry
issues, including upcoming spectrum auctions, competitors’ network
build plans and the potential for large-scale M&A. Maintain BUY.
Investment highlights
 More targeted promotions continues to lead the industry in terms of aggressive pricing, the
magnitude of disruption has been lower. Recent promotional activity
– i.e., four lines for $100, slated to end this month – appears to be
more limited, with a longer-term intent to offer more data and
ancillary services at comparable price points.
Network goals – The company has been accumulating low-band
spectrum throughout the year in the secondary market and
discussed the possibility of expanding coverage to 300M POPs. Such
a move, however, would likely be contingent on the results of the
upcoming AWS and broadcast auctions.
 Maintain BUY, $39 target – Management’s aggressive strategy is
enabling market share gains and, though we believe the absence of
a credible, immediate-term acquirer eliminates some M&A upside
potential, we continue to recommend T-Mobile US

Stratasys BUY Target Price $150

SSYS : NASDAQ : US$120.63
BUY 
Target: US$150.00

COMPANY DESCRIPTION:
Stratasys Ltd. is a global provider of 3D printing solutions,
including a wide range of 3D printers, consumable print
materials and services. Stratsys Ltd. was formed with the
merger of Stratsys and Objet in a stock-for-stock merger
completed in December 2012. The combined company
has an impressive portfolio of 3D printing and direct
digital manufacturing solutions.
All amounts in US$ unless otherwise noted.

Transportation and Industrials — Manufacturing Technology
ANALYST DAY EFFECTIVELY COMMUNICATES MANAGEMENT’S STRATEGIC VISION
Investment recommendation
SSYS management laid out a solid case for driving strong top line organic
growth (25%+ over next 3-5 years) during Monday’s analyst day in New
York. Momentum remains healthy at the high end for Fortus and
Connex3, which is likely to yield strong follow-through materials sales
and gross profit, while new product introductions are continuing at a
rapid pace (41 in 2014) and should keep the channel invigorated. The
presentations also clearly illustrated compelling synergies between a
recently expanded service bureau capability (Solid Concepts and Harvest
acquisitions) and strategic sales efforts for hardware and materials that
address the desire of large global customers to explore the full range of
3D printing’s ROI potential in their manufacturing and design activities.
We are reiterating a BUY rating and $150 price target, and see EuroMold
(late November) as a looming positive catalyst for SSYS based on 10+
additional new product introductions to be made during the show.
Investment highlights
 SSYS at the analyst day announced the launch of two new Connex1
and Connex2 printers at lower price points to complement the
Connex3 printer that has strong customer traction. The new printers
add increased functionality and share a common family platform with
Connex3 and replace the Eden Series of Connex printers. Additionally
SSYS announced the launch of the new FDM ASA outdoor material
offering targeted at automotive applications. Management expects to
announce more than 10 new products at EuroMold this November.
 Stratasys reiterated its 2014 guidance for revenue of $750-770M
compared to our estimate of $759.6M and consensus of $758.8M and
EPS of $2.25-2.35 compared to our in-line estimate of $2.31.
Management reiterated a long term revenue target of 25%+ growth
with long term operating margins of 18%-23%.

HEICO Corporation

HEI : NYSE : US$52.05 BUY 
Target: US$65.00

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
Q3/14 PREVIEW
Investment recommendation
HEI is scheduled to report its Q3/14 results after the market close
on Aug. 26. In our view, sentiment on the stock has turned overly
negative due to concerns about slower growth in the commercial
aerospace market, margin improvement in the defense business,
and valuation. We believe the long-term positive thesis still holds,
and we believe the Q3/14 results will provide a positive catalyst.
We are maintaining our BUY rating and our $65 price target.

 

Investment highlights
 HEI management has gone out of its way to stress the
difficult Q3/13 comp (up 17% organic growth) in the FSG
segment. The comp Q2/14 results point to ~10% quarter for
FSG, which is in our model. We see the downside of FSG
organic growth as high single-digits. We believe anything
over 10% will be a strong catalyst, but an in-line quarter
(FSG organic growth of 8-10%) will not disappoint investors.
 We expect some ETG margin improvement (we model in
23%) but expect an additional step up in Q4/14.
 We believe HEI will raise its EPS guidance to up ~15%, from
the current 13%, which implies 2014 EPS of $1.76. We are
maintaining our 2014 $1.79 EPS estimate. We do not expect
any increase to the revenue guidance.
Valuation
Our $65 price target is based on the average of a 32.0x EPS
multiple and a 15.0x EBITDA multiple, applied to our 2015
estimates.

Stantec Inc.

STN : TSX : C$70.12
STN : NYSE
BUY 
Target: C$78.00

COMPANY DESCRIPTION:
Focused on fee-for-service work, Edmonton-based
Stantec plans, designs, and manages projects in the
North American infrastructure and facilities sector. The
company’s business model incorporates diversity across
regions, end markets, and all phases of the infrastructure
life cycle to manage risk and deliver growth. 2013
marked Stantec’s 60th consecutive year of profitability.

Sustainability — Infrastructure
SOLID Q2/14 RESULTS; MAINTAIN BUY RATING AND INCREASING TARGET TO

C$78.00 (FROM C$75.00)
Investment recommendation
We are maintaining our BUY rating and increasing our one-year target
price to C$78.00 from C$75.00 following better-than-expected Q2/14
financial results, an increase in our estimates, and as we roll forward
our valuation base by a quarter. We still believe that Stantec’s 5%
targeted organic growth rate for 2014, paired with the strong pick-up in
acquisition activity (closed and announced deals), are supportive of the
company’s long-standing growth targets. In our view, Stantec should
remain a core holding: management has a clear and consistent strategy
and game plan, no lack of opportunities to drive average annual revenue
and earnings growth of ~15% for the foreseeable future, and a long
track record of very disciplined and consistent execution. We also expect
regular annual dividend increases of 10% or more for the foreseeable
future.
Valuation
We rely on our five-year DCF model (10.5% discount rate) to value
Stantec. Our target price equates to a P/E multiple of 20.0 times and an
adjusted EV/EBITDA multiple of 11.4 times our 2015 estimates. Given
the company’s available growth opportunity and consistent ROE (~18%
level), we view these multiples as supportable, although nearer to the
higher end of the historical range. We are comfortable with this given
current overall momentum, where we are in the cycle, and what we feel
are relatively conservative forward estimates.

Finning International Inc

FTT : TSX : C$31.84 BUY 
Target: C$35.00

Finning International Inc. is the world’s largest Caterpillar
equipment dealer. Finning sells, rents and provides
customer support services for Caterpillar equipment and
engines in western Canada, the United Kingdom and
parts of South America. Headquartered in Vancouver,
British Columbia, Canada, Finning is a widely held,
publicly-traded corporation, listed on the Toronto Stock
Exchange (symbol FTT).
All amounts in C$ unless otherwise noted.
Infrastructure — Equipment Distribution and Rentals
GETTING SHAREHOLDER FRIENDLY?
REITERATE BUY; TARGET RAISED
Investment recommendation
We rate Finning a BUY. In our view, the company could be in a position
by year-end to return a meaningful amount to cash to shareholders,
possibly up to $500 million. Separately, management’s efforts to drive
EBIT and lower invested capital could drive 35 cents in incremental EPS
over 2-3 years. We take our target to C$35.00 (from C$33.50) as we roll
our valuation period forward to 2016E EPS. We maintain a 14x target
P/E. FTT trades at 13.6x 2015E EPS vs. close comps at 14.5x.
Investment highlights
Q2/14 EPS was $0.50 (+4% y/y), ahead of our $0.45 estimate and the
Street at $0.46. Revenue of $1.8 billion increased 9% y/y on strong oil
sands deliveries, Product Support growth of 4% y/y, and FX. Gross
margin of 29.6% was 60 bps below our estimate due to the high
proportion of New Equipment sales. SG&A of $388 million (22.0% of
revenue) was down from $392 million (24.2% of revenue) in Q2/13. This
left EBIT at $137 million (7.8% margin), which compares to our $122
million estimate (7.2% margin), and last year at $123 million (7.6%).
Steady backlog of $1.1 billion (flat y/y) affords decent visibility in 2H/14.
FCF was the highlight of the quarter coming in at $123 million vs. $7
million last year on lower capex and better inventory turns. TTM FCF is
an impressive $500 million and the debt/cap should be at the low end of
management’s target range (35-45%) by year-end (currently 41%)
leading us to believe a return to shareholders could be in the cards. We
do not see competing options (M&A, reinvestment) as probable.