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.

EXA Corporation BUY

Exa Corporation

EXA : NASDAQ : US$13.69
BUY 
Target: US$16.00

COMPANY DESCRIPTION:
Exa is the leading provider of simulation software to the
ground transportation industry. The firm’s technology is
used by more than 90 global vehicle manufacturers to
help design efficient products via digital prototype. Exa
was founded in 1991, went public in June of 2012, and
is headquartered in Burlington, MA.
All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications
A RESPECTABLE QUARTER RESTARTS THE CLOCK TO BUILDING A TRACK RECORD OF EXECUTION. BUY.
Exa’s valuation is cheap enough and the firm’s business, which is basically
high fidelity fluid simulation, is seeing sufficient demand that we believe it is
reasonable for the firm to at least hit our estimates. If that happens, the most
likely baseline appreciation for the stock should be somewhere between
revenue and free cash flow growth, or about 15%. Exa would have to put up
some more “no drama” quarters before we would make the case, but if they do
so, you could make the case for a multiple expansion in the back half of 2014
as 2015 comes into view, which could propel the stock towards $20, which is
above our current price target (there are also obvious downsides if the firm
misses numbers, which we assume any investor with more than five minutes of
experience understands). Reiterate BUY.
 A nice quarter: return to double digit growth. Exa reported revenues and
adjusted EBITDA of $14.1M (+12% y-o-y) and $1.6M (11% margin), which
were respectively $0.4M and $0.1M ahead of our estimates. Non-GAAP
EPS of $0.05 was ahead of our $0.04 estimate, and YTD Exa has generated
operating cash flow of $4.4M compared to a ($4.1M) loss a year ago.
 Color from the call. Project activity in the passenger car segment has
gained momentum over the last two quarters, and Exa noted some early
renewal activity ahead of normal Q4 seasonality. While aerospace is
becoming a more meaningful contributor, the truck and off-highway
markets are showing little growth globally.
 Outlook:

A wide range, but in line for Q4. Management suggested that the firm will invest for growth if activity remains at current levels, so we have proactively trimmed our F2015 profit expectations. The firm’s goal remains to return organic revenue growth to the 15-20% range.

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.

Linamar Corp. Raising Target Price To $43

LNR : TSX : C$35.67
BUY 
Target: C$43.00

COMPANY DESCRIPTION:
Linamar is a leading industrial manufacturer specializing in machined automotive components (mainly engine, transmission and other driveline components) and other industrial systems (aerial work platforms and related products, energy product assemblies, agricultural equipment assemblies). The company operates principally from Guelph, Canada but it has growing operations in Europe, the U.S., Mexico and Asia.
All amounts in C$ unless otherwise noted.

Transportation and Industrials — Auto Components
Q3/13: LARGE POSITIVE SURPRISE, FORECAST, TARGET BOOSTED
Continue to recommend BUYing for good growth potential
LNR remains attractive for a strong EPS growth profile from strong organic sales growth in its Powertrain/Drivetrain (P/D) automotive segment and sales growth and margin expansion in its Industrial segment.
Q3/13 results were consistent with this thesis and then some. We boosted our target on a slightly stronger mid-term forecast, powered by slightly stronger sales and margin assumptions, and our usual one-quarter valuation period roll forward.
Q3/13: large beat on sales and margins
EPS came in at $0.80, much stronger than our $0.64 forecast and the consensus mean estimate of $0.66. EPS was up a healthy 54% YOY.
LNR is clicking on most cylinders. P/D benefited from launches and strong industry volumes. Industrial continues to rebound but remains below potential. P/D sales and margins and Industrial margins all came in stronger than we expected.
LNR guided to very strong margins in 2014 (in the same ballpark as the very strong 2013 margins). This was a large upside surprise. Sales expectations are good too.
We boosted our 2014 forecast on the margin guidance upside surprise. Mid-term prospects appear relatively unchanged, suggesting an eventual margin decline at P/D. Our mid-term forecast is only slightly stronger.
Premium valuation given growth and industry outlook
We continue to value LNR at 5.75x EV/NTM EBITDA (5.75x Q3/14E EV to Q4/14E – Q3/15E EBITDA), which is about 0.75x higher than normal. We are using a premium multiple given LNR’s growth and excellent industry fundamentals.

Veeco Instruments SELL

VECO : NASDAQ : US$30.59
SELL 
Target: US$22.00

COMPANY DESCRIPTION:
Veeco Instruments manufactures process equipment and instrumentation for the LED, solar, data storage, wireless,
semiconductor and scientific research markets. Veeco’s manufacturing and engineering facilities are located in New York, New Jersey, California, Colorado, Arizona and Minnesota, and sales offices are found globally.

Investment highlights
 Our current rating is in-line with our bearish view that there is limited upside for both MOCVD equipment names.
 Now that the company is current we have seen the expected negative effect on Veeco’s margins due to price competition and lack of a bubble-type spending environment which we do not believe will be repeated. We do not envision that pricing will materially recover over the next investment cycle, continuing to weigh on margins.
 While we are bullish on the SSL secular trend, we believe expectations for both Veeco and AIXTRON are not in-line
with the new normal of a 200-400 annual tool market.
 We see some potential upside from Synos; however, this technology is still nascent and we harbor concerns about the increase in OPEX to support this and other new initiatives.
 We believe that fundamental downside exists in VECO shares, despite investor enthusiasm on the secular trend.
Given the risks of a slower MOCVD cycle and limited earnings power we would advise investors put money downstream for exposure to the LED macro.

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