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.

Stuart Olson Inc.

SOX : TSX : C$9.87 BUY 
Target: C$14.00

COMPANY DESCRIPTION:
The Churchill Corporation provides commercial and
institutional building construction, industrial construction,
industrial insulation, industrial electrical and
instrumentation, and maintenance and related services
in Canada. It operates in three segments: General
Contracting, Industrial Services and Commercial Systems.
All amounts in C$ unless otherwise noted.

Infrastructure — Engineering and Construction
THESIS INTACT DESPITE SOFT GUIDE; REITERATE BUY; TARGET TO C$14.00
FROM C$14.50
Investment recommendation
We view Stuart Olson as a late cycle industrial play that, at this juncture,
offers investors unparalleled revenue visibility and meaningful cyclical
margin upside; we rate the stock a BUY. A solid balance sheet (3x
debt/LTM EBITDA) and attractive 4.9% dividend yield only further
enhance the Stuart Olson investment case. While lackluster 2014 margin
guidance has caused us to trim our estimates, it does not diminish the
company’s long-term investment case, in our view. Our target is based
on 6x 2016E EBITDA (7x 2015E previously). Stuart Olson trades at 6.3x
2015E EBITDA vs. its peers at 5.8x.
Investment highlights
Q2/14 revenue was $334 million (+20.2% y/y) and EBITDA was $10.5
million (+21.1% y/y) compared to our respective estimates of $304.7
million and EBITDA $11.5 million. The consensus revenue and EBITDA
estimates were $306.2 million and $11.6 million. Revenue beat in
SODCL but margin was weaker than expected as execution on some oil
sands jobs was challenged.

However, the Industrial segment, benefiting from the maintenance spend in the oil sands, posted EBITDA that was 12% better than expected. Management expects group EBITDA margin to be flat to slightly down from 2013 due to mix at Canem. Key to our thesis, SODCL EBITDA margin is expected to improve in 2H/2014.
The book-to-bill was 0.7:1.0 leaving backlog at $2.1 billion (+17% y/y).
With key long-term contracts with Shell and Suncor up for renewal this
year and an otherwise robust bid funnel we believe this level of backlog
can be maintained through year-end, providing visibility through 2018.

TransDigm Group

TDG : NYSE : US$190.97

BUY 
Target: US$200 
COMPANY DESCRIPTION:
TransDigm Group, headquartered in Cleveland, Ohio, is a
leading supplier of engineered components and systems
for military and commercial aircraft. Approximately 90%
of sales are from proprietary products, and approximately
75% from sole-source products

Transportation and Industrials — Airlines and Aerospace
COMPANY DECLARES $25 SPECIAL DIVIDEND
Investment recommendation
TDG announced it has wrapped up the financing for its $25 special
dividend. We believe leverage is now >6.0x, which is consistent with
prior peaks. Moreover, the company has lowered its weighted cost of
debt by ~1% through the refinancing. While the dividend is a positive
confirmation of the strong cash flow and aggressive balance sheet
management, to the extent that it signals a lack of significant
acquisitions, it appears to be a net negative. We maintain our BUY
rating and $200 price target.
Investment highlights
 While we applaud the special dividend, which was basically as
expected, it is difficult to view this as anything but slightly negative
for the M&A pipeline. The company still has significant capacity, but
the lack of meaningful deals is a concern. Key catalysts remain M&A
and capital return.
 Moreover, we believe commercial aftermarket growth could get
close to 10% and maybe just over for Q3/13, but we continue to see
full year commercial aftermarket up in line with guidance, high SS,
with little chance of market upside relative to expectations.
Valuation
We are maintaining our BUY rating and our $200 price target

Westport Innovations Inc. Continue To AVOID

WPRT : NASDAQ : US$16.91 WPT : TSX
AVOID

 Target: US$20.00

We have written about the research company that walks like an investment – and said avoid from – was it $40 down- despite the enthusiasm of Motley Fools- better to engage as a client of Jack A. Bass Managed funds is the lesson here.

COMPANY DESCRIPTION: Westport Innovations is a leading developer of technologies that allow engines to operate on gaseous fuels such as natural gas across light, medium, heavy and high horse power market applications.

Investment recommendation

AVOID

Macro challenges keep share volatility high, while the company works to introduce engine platforms and book orders in ‘14. The recent follow-on offering helps alleviate cash issues near-term ($210.6M cash at year-end vs. burn of $26.9M in Q4). While we continue to favor the strategy (and the nat gas macro), risk/reward stays balanced.
Investment highlights

 Few changes this quarter, as Westport finishes a challenging 2013 and looks to transition from R&D phase to increased product adoption in 2014 (with heightened focus on cost optimization and prioritized investments  goal of breakeven adjusted EBITDA for all three units by year-end).
 The outlook for 2014 implies solid growth (~7-13%), despite a ~$25M headwind from discontinuation of first generation HPDI (as focus turns to roll-out of HPDI 2.0 and expectation of improved warranty accruals – work underway with several OEMs currently).
 CWI and Weichai continue to grow nicely, with both JVs reporting record volumes for the year (2014 expected to benefit from ramp of ISX12G and build-out of additional capacity at Weichai). Early opportunities in rail/mining/marine also continue to progress nicely.
 Our 2014 revenue/EPS estimates go to $184M/$(1.80) from $241M/$(1.90); F2015 is introduced at $300M/$(0.90).
Valuation Our $20 price target (from $28) is derived by applying a 4x multiple to our 2015 sales estimate of $300M

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.

ORBCOMM Buy Target Price $9

ORBC : NASDAQ : US$6.60
BUY 
Target: US$9.00

COMPANY DESCRIPTION:
ORBCOMM is a leading provider of global machine-to-machine (M2M) solutions and the only commercial satellite network 100% dedicated to M2M.
All amounts in unless otherwise noted.

Technology — Communications Technology — Wireless Equipment
UTILIZING SATELLITE ASSETS TO TRANSITION TO LEADING END-TO-END M2M SERVICES COMPANY; INITIATE WITH BUY AND $9 PT

Investment recommendation:

We believe ORBCOMM is successfully transitioning from a satellite services provider to a leading end-to-end solutions provider for the machine to machine (“M2M”) or Internet of Things (“IOT”) market. In fact, we believe recent customer wins with Hub Group, Ryder, and Doosan not only provide ORBCOMM with roughly $80M to $100M in sales visibility over the next several years, but these deals also demonstrate ORBCOMM’s strong end-to-end solutions for several leading M2M vertical markets. With ORBCOMM’s planned launch of its new satellite network OG2, combined with its partnerships with Inmarsat and Globalstar, we believe the company’s improved network coverage and increased network bandwidth enhance its end-to-end solutions offering and position the company to build on its M2M solutions deal momentum. While investments to grow its M2M services platforms have limited 2012 and 2013 adjusted EBITDA growth, we believe recent deal wins will result in adjusted EBITDA growth returning in 2014 with accelerating growth in 2015 and beyond. We initiate coverage with a BUY rating and $9 price target.
Investment highlights
 We believe ORBCOMM’s transition over the past couple years to an end-to-end solutions provider for leading M2M vertical markets is underappreciated by investors. In fact, we believe ORBCOMM is entering an inflection point in its financial model as the transformation to a greater mix of managed services positions the company for improving ARPU trends, accelerating sales growth, and strong growth in adjusted EBITDA or operating cash flow over the next several years.
 While the OG2 launch could prove more difficult with additional costs or potential delays versus our expectations, we believe the launch of its new satellite network combined with partnership deals with Inmarsat and Globalstar improve ORBCOMM’s network coverage and bandwidth to enhance its M2M solutions offering.
 We are introducing our 2013 estimates for revenue of $74.2M and adjusted EBITDA of $16.3M, 2014 estimates of $86.2M and $19.7M, and 2015 estimates of $101.3M and $27.7M.
Valuation: Our $9 price target is based on shares trading at a multiple of roughly 15x EV/adjusted EBITDA based on our 2015 estimates.

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.

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.

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