Blackberry helps Boeing with its hyper-secure ‘Black’ smartphone : TD Upgrade

On top of laser weapons, passenger jets and space stuff Boeing is also, weirdly, building an ultra-secure Android smartphone called “Black” (not to be confused with theBlackphone). According to the Telegraph, it’s now enlisted BlackBerry’s help to make it even more secure, though it’s not clear how, exactly. Blackberry CEO John Chen said “we’re pleased to announce that Boeing is collaborating with BlackBerry to provide a secure mobile solution for Android devices utilizing our BES 12 platform” and quickly added, “that, by the way, is all they allow me to say.” The Boeing Black smartphone recently cleared the FAA FCC and comes with all the stuff a spook or G-man could want.

That includes dual-SIM capability, which is unusual for a US-built device but would be very helpful for intelligence agents. (Incidentally, if you pull a Boeing Black smartphone out at airport security, doesn’t it automatically give you away as a spy?) It also has swappable backplates that allow satellite or radio capability, solar power chargers and biometric sensors. Security-wise, it includes disk encryption, hardware crypto capability and the pièce de resistance: a case that will delete all user data in case of tampering.

Though Boeing’s role in the whole thing may seem odd, it has an inside track with the defense and security community, and specifically developed its Boeing PureSecure system for mobile devices. At this point, BlackBerry is certified for use by the DoD, but as far as we can tell, Samsung’s Knox is still the only system okayed by the NSA to carry classified documents.


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

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
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.
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

WestJet Airlines Ltd.

WJA : TSX : C$30.15
Target: C$34.00

Disclosure : I fly westjet whenever possible – great service from Canada’s version of Southwest

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
All amounts in C$ unless otherwise noted.

Transportation and Industrials — Airlines and Aerospace
Maintaining HOLD
We are maintaining WJA at a HOLD due to the combination of moderate
implied return to our target and forecast uncertainty. We remain
uncertain about WJA’s RASM prospects (guidance of positive but lower
than Q2/14) and this could provide downside risk.
Good Q3/14 expected sales growth on margin expansion
We project a 38% increase in EPS for WJA in Q3/14 from better sales and
profitability from the company’s initiatives.
Key drivers should include further benefits from WJA’s Plus premium
economy, Encore regional and cost-cutting initiatives. In addition, we
expect a much less severe CAD/fuel headwind than in H1/14.
But, as noted above, WJA’s RASM picture remains fuzzy. There may be
downside risk to our Q3/14 EPS estimate due to RASM. We estimate each
1% reduction in RASM growth from our 3.1% forecast would result in a
$0.05 reduction in our Q3/14 EPS forecast.
Continue to use moderate valuation multiple
We continue to value WJA at a moderate 5.5x EV/NTM EBITDAR (5.5x
Q2/15E EV to Q3/15E – Q2/16E EBITDAR) valuation multiple. This
multiple is close to the industry valuation average and our $35.81 DCF

Bombardier Inc.

BBD.B : TSX : C$3.50

Target: C$5.50


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
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.


HEICO Corporation

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

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
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.
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

The Boeing Company Come Fly With Me

BA : NYSE : US$125.58 BUY 
Target: US$160.00
Transportation and Industrials — Airlines and Aerospace
Investment recommendation
We believe BA’s strong hint that rates will go up further on the
737 is a strong statement about its confidence in the commercial
cycle, and a positive catalyst. It will also help BCA margins and
cash flow as BA frees up additional slots to sell. With BA stock
outperforming the market since the commentary, we believe a
step up in 737 rates is a positive catalyst. We continue to like
Boeing for the potential cash flow upside, and strength in the
commercial cycle.
Investment highlights
 We believe that the 737 accounts for over 50% of BA’s
earnings, but is also a very significant program for SPR, DCO,
as well as most of our sector. We believe that a step up to
52/month on the 737 can add the most to BA, DCO, ESL and
SPR valuations.
 We are concerned that a rate of over 50/month from both
Boeing and Airbus adds additional risk if these rates are not
sustainable. We believe the supply chain is focused on
50/month as a natural threshold.

Our $160 price target is based on the average of an 18.0x EPS
multiple and a 12.0x EBITDA multiple, applied to our 2015

TransDigm Group

TDG : NYSE : US$190.97

Target: US$200 
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
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.
We are maintaining our BUY rating and our $200 price target