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1、1/4/13,Price,January 6,2013Americas:Aerospace&DefenseEquity Research2013 Outlook:Aftermarket,787,cash,M&A to drive outperformanceAerospace:Aftermarket and 787 to drive 2013 outperformance,In Commercial Aerospace,we believe two major themes that will driveoutperformance are a reacceleration in afterm
2、arket and the ramp of the 787,U.S.AEROSPACE&DEFENSE COVERAGEPrice Targets Revisions,to 10/month.We continue to believe in the OE backlog case.And we stilllike the long-term story for business jets but the near-term is choppy.Aftermarket restock:Rates of growth slowed significantly in 2012 as,RatingA
3、erospace SuppliersBEAV CL-Buy$51,12-moPT$67,Upside31%,comparisons were difficult and airlines were destocking inventory.But we,ESL,Neutral,$66,$75,14%,think starting in 1Q13 the former will be annualized and the latter will end.787 product cycle:If 5/mo to 10/mo can go as smoothly as 1/mo to 5/mo,it
4、will result in significantly larger quarterly delivery numbers,big cash flowimprovement for BA,and large earnings contributions for certain suppliers.,HXL BuyPCP CL-BuyCOL SellSPR NeutralTDG BuyTGI Buy,$28$193$59$17$140$68,$35$234$53$17$164$87,25%21%-11%-2%17%28%,UTX,Neutral,$84,$87,4%,Defense:Budge
5、t well understood,capital allocation now key,Aerospace OEMs,In Defense,while all budget scenarios generate general pressure on,BA,CL-Buy,$77,$98,27%,Defense spending,that is now particularly well understood by the market,and the rate of change from the current plan to potential other outcomes,at thi
6、s point,is simply not that large.We see the potential for M&A to pickup in the sector if there is an eventual resolution to sequestration,and alsobelieve“social contracts”from the primes will remain robust.DoD spending scenarios:At this point in the Defense budget cycle,webelieve it has become conse
7、nsus to expect pressure on Defense spending,BBD NeutralERJ NeutralTXT BuySmid-cap DefenseATK BuyAVAV NeutralFLIR NeutralHRS NeutralHII Neutral,$3.9$29$25$64$22$23$50$44,$4.2$29$33$83$25$22$56$46,9%0%30%30%12%-6%12%4%,for several years.And while that is likely true,the degree and duration may,be less
8、 severe and more manageable than the market believes.Capital allocation:In a zero-to-negative growth environment,those thatgenerate the most cash and deploy it well are likely to outperform.Weremain focused on the social contract(dividend yield+share repurchase,Large-cap DefenseGD SellLLL NeutralLMT
9、 NeutralNOC NeutralRTN Sell,$71$78$93$68$59,$67$88$102$69$55,-6%13%9%1%-6%,accretion),and on potential M&A candidates.Our top picks in the sectorOur CL-Buy names in Aerospace are BA,PCP,and BEAV.Other Buys inAerospace include TDG,TGI,TXT,and HXL.Our best pick in Defense isATK.Our Sell-rated names ar
10、e COL,GD,and RTN.We revise price targets and introduce 2105E EPS across the groupWe revise price targets as we move to target 2014E from 2013E.And haveintroduced 2015E estimates across the group.The changes are shown tothe right and detailed in the report.,Source:FactSet,Goldman Sachs Research estim
11、ates.US Aerospace Coverage view-AttractiveUS Defense Coverage view-Neutral,Noah Poponak,CFA(212)357-0954 Goldman,Sachs&Co.Omear Khalid(212)357-2226 Goldman,Sachs&Co.Nicholas Sammut(212)902-3698 Goldman,Sachs&Co.Zhe Shen(801)884-4266 Goldman,Sachs&Co.The Goldman Sachs Group,Inc.,Goldman Sachs does an
12、d seeks to do business withcompanies covered in its research reports.As a result,investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in makingtheir investment decision.For
13、 Reg AC certification and otherimportant disclosures,see the Disclosure Appendix,or go Analysts employed by non-US affiliates are not registered/qualified as research analystswith FINRA in the U.S.Global Investment Research,3,3,3,3,16,16,18,18,19,26,27,2,January 6,2013ContentsSummary:Key themes and
14、top picks for 2013Key themes in AerospaceKey themes in DefenseOur top picks in the spaceRegional jetsBusiness jetsDefense:Whats currently priced in/expectedWhat do Defense stocks already priceDefense:the social contract and M&ACash generation and deployment to drive differentiationFundamentals suppo
15、rtive of potential M&A activityGS EPS estimates vs.consensusGS US valuation multiples and share price performanceDisclosure AppendixGoldman Sachs Global Investment Research,Americas:Aerospace&Defense111328,3,January 6,2013,Americas:Aerospace&Defense,Summary:Key themes and top picks for 2013Key theme
16、s in AerospaceIn commercial Aerospace,we think two major themes that will drive outperformance are areacceleration in aftermarket and the ramp of the 787 to 10/month.We continue to believein the OE backlog case.And we still like the long-term trajectory for business jets but thenear-term is choppy.R
17、eacceleration in the aftermarket.The 2H of the 787 ramp.Ongoing strength in OE.Mixed results in business and regional jets.Key themes in DefenseIn Defense,while all budget scenarios generate general pressure on Defense spending,thatis now particularly well understood by the market,and the rate of ch
18、ange from the currentplan to potential other outcomes,at this point,is simply not that large.We see the potentialfor M 12-month price target$67):In our view,BEAVis the best positioned aerospace supplier for what is unique about this Aerospacecycle:(1)OE and aftermarket cycles converging(BEAV has equ
19、al exposure to both),(2)mix shift toward wide-body aircraft for which BEAV has substantially morecontent than narrow-body,(3)more profitable airlines that can spend more onretrofits,(4)record load factors translating to above-average interior maintenance.The move in to supplier furnished equipment(S
20、FE)could be transformative.Goldman Sachs Global Investment Research,4,January 6,2013,Americas:Aerospace&Defense,BuysTransdigm(Buy;12-month price target$164):TransDigm dominates its nichesof commercial aircraft,resulting in superior pricing power,which when combinedwith low capital intensity makes it
21、 the most profitable and cash generativecompany we cover.It also fully utilizes its cash generation and balance sheet toacquire companies with similar characteristics,allowing investors to reap thebenefits of compounding faster than others.Triumph(Buy;12-month price target$87):In our view,TGI is one
22、 of the leastunderstood and appreciated stories in the Aerospace supply chain.The companyhas solid growth drivers(Aerospace O.E.,with more wide-body than narrow-body)and is in the middle of a transformational period with relatively new managersintegrating the Vought acquisition and driving what we e
23、xpect to be greatermargin and cash flow improvement than most other companies in Aerospace.Textron(Buy;12-month price target$33):Our positive view of TXT is driven by(1)the significant cyclical upside that remains in business jets,(2)Bell being wellpositioned in military helicopters and at a cyclica
24、l trough for commercialhelicopters,(3)strong new management with the potential to significantly improveoperating performance and returns(CROCI),and(4)seemingly low expectations.Hexcel(Buy,12-month price target$35):We believe HXL is one of the leadingbeneficiaries of the share shift to composite from
25、 metal on next generation aircraft(i.e.,the 787 and A350),generating excellent visibility in to several years of double-digit organic growth.HXL is just now moving from several years of capacityinvestment,which was required in order to support the growth in aerospacecomposites,in to a harvest phase
26、where we expect capex to decline steadily whilefree cash and returns on capital improve significantly.Alliant Techsystems(Buy;12-month price target$83):ATK has been a materialunderperformer for several years(down 8%vs.the S 12-month price target$55):After GD,RTN has the lowest FCFyield in the group
27、and the lowest combined dividend yield+share repurchaseaccretion.We also believe RTN is the consensus favorite amongst the primes,butits growth,backlog/new orders,and margin profile have been very similar to peerswhile cash generation has been slightly weaker.Goldman Sachs Global Investment Research
28、,5,January 6,2013,Americas:Aerospace&Defense,Aerospace:Reacceleration in aftermarket growthFollowing the slowdown seen in 2012,we expect the rate of growth in CommercialAerospace aftermarket to accelerate quarter by quarter throughout 2013.We expect stockswith significant exposure to the aftermarket
29、 to experience multiple expansion,andpotential upward estimate revisions,as a result.Exhibit 1 shows our Aerospace coveragesorted by aftermarket exposure.Exhibit 1:Commercial aerospace aftermarket sales contribution by supplierCL-Buy BEAV and Buy-rated TDG have by far the most aftermarket exposure50
30、%40%30%20%10%0%,HXL,SPR,TXT,BA,TGI,BBD,PCP,ERJ,ESL,UTX,COL,TDG BEAV,Source:Company data,Goldman Sachs Research estimates.For much of the current Aerospace cycle,we have preferred OE to aftermarket,and we stilllike several OE levered stocks.But we now believe it is consensus to think the aftermarketi
31、s weak and that aftermarket driven stocks should be avoided.So expectations appear fairlylow for the end market.But we think the second derivative is turning now as an airlineinventory destock has run its course and the most difficult comparisons have annualized.With regard to comparisons,the strong
32、est rates of growth were seen late in 2010 and early2011,and therefore the toughest comparisons were in early 2012.Rates of growth startedto slow in late 2011,and decelerated every quarter thus far in 2012.So 1Q13 will haveannualized the most difficult comparisons,and all quarters in 2013 will compa
33、re to asingle-digit growth rate,and to a slower rate quarter by quarter.Exhibit 2 shows historicalaftermarket growth rates.Goldman Sachs Global Investment Research,6,January 6,2013Exhibit 2:Quarterly aftermarket growth ratesTougher comparisons are closer to annualized,Americas:Aerospace&Defense,Aero
34、space Equipment,1Q09,2Q09,3Q09,4Q09,1Q10,2Q10,3Q10,4Q10,1Q11,2Q11,3Q11,4Q11,1Q12 2Q12 3Q12,Meggitt,1H09,2H09,commercial aftermkt(large,biz,regional jet),n/a,-14%,n/a,-28%,-9%,-2%,6%,29%,9%,18%,17%,4%,n/a,1%,n/a,Safran Aircraft Equipment,total aftermarket(c90%civil aero),n/a,n/a,n/a,n/a,n/a,n/a,n/a,n
35、/a,8%,4%,10%,11%,3%,5%,3%,BE Aerospace,Consumables(all aircraft types),-17%,-53%,-38%,-22%,-22%,-2%,7%,0%,8%,9%,9%,13%,10%,3%,-2%,Goodrich,civil aftermarket(all aircraft types),-8%,-16%,-19%,-20%,-10%,-3%,3%,12%,12%,16%,11%,15%,5%,n/a,n/a,Honeywell,commercial aftermarket(large and regional jets)comm
36、ercial aftermarket(biz and gen.aviation),-11%-25%,-14%-31%,-17%-27%,-21%-23%,-4%-1%,-4%8%,4%10%,7%15%,13%18%,17%29%,14%25%,21%23%,11%30%,4%19%,3%13%,Rockwell Collins(calendarized data),commercial aftermarket(all aircraft types),-14%,-17%,-23%,-12%,-4%,6%,18%,20%,15%,14%,3%,14%,9%,0%,12%,TransDigm(ca
37、lendarized data),commercial aftermarket(all aircraft types),-2%,-8%,-10%,-13%,-3%,9%,14%,21%,22%,25%,21%,19%,7%,7%,4%,Hamilton Sundstrand-orders not sales,commercial aftermarket(all aircraft types),-26%,-14%,-19%,-21%,7%,7%,13%,31%,23%,25%,24%,17%,1%-10%,-6%,Pratt&Whitney-orders not sales,commercial
38、 aircraft spares(large jets),-28%,-25%,-18%,-25%,-10%,8%,35%,45%,33%,23%,3%,-16%,-3%-15%-21%,Average,-16%,-21%,-21%,-21%,-6%,3%,12%,20%,16%,18%,14%,12%,8%,2%,1%,Source:Company data,Goldman Sachs Research estimates.With regard to the airline inventory destock,we believe airlines built significant inv
39、entoryin 2010 and 2011,and then destocked inventory throughout 2012.However,the latestdatapoints show that airline inventory trends may have started to reverse.Exhibits 3 and 4show a compilation of airline spares inventory.Exhibit 3 is US Air Carrier Form 41 reportedspare parts inventory.Exhibit 4 i
40、s total global airline inventory balances.,Exhibit 3:US Air Carrier Form 41 reported spare partsThe U.S.airline destocking period appears to be turning40%,Exhibit 4:Global airline inventory balancesAirlines across the globe seem to have stopped destocking30%,30%20%20%,10%0%,10%0%,-10%-10%-20%,-30%,-
41、20%,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012,2003,2004,2005,2006,2007,2008,2009,2010,2011,Source:Bureau of Transportation Statistics.Goldman Sachs Global Investment Research,Source:Compiled by Goldman Sachs Research.,0,7,January 6,2013,Americas:Aerospace&Defense,Aerospace:the 787 ramp moves
42、 in to a higher gearThe 787 is the most important and powerful product cycle the Commercial Aerospacesector has seen in many years.It will drive significant growth and cash flow improvementfor Boeing for several years,beyond the already strong growth we expect from legacyaircraft programs.It will al
43、so drive significant revenue and EPS growth for many ofBoeings key suppliers that have meaningful content on the program.Because of the verylarge backlog for the program(806 unfilled orders vs.our estimate of 78 deliveries in 2013),we expect growth to occur independent of the macro-economic environm
44、ent or dynamicsof the Aerospace cycle.Exhibit 6 highlights the growth in aircraft production and the extension of the upcomingaircraft delivery build cycle that the 787 provides for Boeing and its suppliers.We projectlegacy programs will begin to flatten out in 2015,but the 787 drives continued tota
45、l unitgrowth even If legacy programs are flat to slightly down.,Exhibit 5:Boeing aircraft deliveries;legacy platforms&787787 drives a significant additional leg to the cycle900,Exhibit 6:Annual delivery growth;w/&w/o 787787 significantly additive to growth rates in the out-years40%30%,120,152,600,39
46、,78,20%,310%,300,0%,290,398,441,375,481,462,474,559,592,640,633,-10%,2005,2006,2007,2008,2009,2010,2011,2012E 2013E 2014E 2015E,-20%,2005,2006,2007,2008,2009,2010,2011,2012E 2013E 2014E 2015E,Legacy Aircraft Deliveries,787 Unit Deliveries,YoY With 787,YoY Without 787,Source:Company data,Goldman Sach
47、s Research estimates.,Source:Company data,Goldman Sachs Research estimates.,BoeingFor Boeing,the 787 program will drive additional top-line growth beyond its legacy aircraftprograms,but more importantly it will drive very strong cash flow growth for severalconsecutive years.The 787 program drove a s
48、ignificant increase in Boeings workingcapital,due to deferred production in the inventory balance.Exhibit 7 shows how dramaticthe decline in inventory turnover has been due to the build ahead of the 787 ramp.Exhibit8 shows our forecast for BA FCF/NI conversion,which we expect to surpass 1.0X(potenti
49、ally by a significant amount)for the next several years.Goldman Sachs Global Investment Research,8,January 6,2013Exhibit 7:Inventory turnover(1997-2015E)Plenty of headroom for inventory improvement10.0 x,Americas:Aerospace&DefenseExhibit 8:Free cash flow(19997-2015E)Free cash to ramp significantly a
50、long with 787 deliveries$10,000,$8,0008.0 x$6,0006.0 x$4,000,4.0 x,$2,000,2.0 x,$0,1997,1999,2001,2003,2005,2007,2009,2011,2013,2015,($2,000)0.0 x,1997,1999,2001,2003,2005,2007,2009,2011,2013,2015,($4,000),Source:Company data,Goldman Sachs Research estimates.,Source:Company data,Goldman Sachs Resear
