We are positive on commercial aerospace and neutral on the defense contractors for the next 12 months. (We are positive on the combined group, because a single ranking must be given to both industries.) Following a global economic downturn, we see moderate improvement in the global economy and growth in commercial air traffic aiding results in commercial aerospace. However, we also believe that high levels of deficit spending in the U.S. and a trend toward increasing spending on social programs will mean continued pressure on the U.S. defense budget going forward.
According to trade association IATA, global passenger air traffic grew 8.2% in 2010, measured in revenue passenger miles, following a decline of 3.5% in 2009. Air traffic increased at an 6.4% rate through July 2011, according to IATA.We continue to see long-term demand fueled by fleet growth in the developing markets and a need to replace aging and less fuel-efficient aircraft in developed markets, particularly in the U.S. At the same time, we see commercial aerospace shares selling at valuations that are near to slightly above historical averages.
We believe global airlines should be profitable in 2011, after a good year in 2010, and we note that order books at Boeing and Airbus contain six to seven years of production at current levels. Both companies have announced significant production rate increases that began late last year and stretch through 2014.We expect the business jet market, which has been battered both by falling corporate profits and political headwinds, to improve slightly in 2011.We also see the aftermarket parts and service business, for business jets and large commercial airplanes, staging a solid recovery in 2011, on increased flight hours for both categories. As for the defense egment, large sums of money from both base and supplementary ("OCO") defense budgets are still affecting defense contractors. In addition, conventional military equipment (planes, ships, tanks, etc.) is aging, and we see a need for equipment replacement/repair as U.S. troops are withdrawn from Iraq. However, the President has requested $350 billion in cuts to the military budget over the next 12 years, in addition to $78 billion already scheduled for the next five. In addition, we see a two-thirds-complete U.S. withdrawal from Iraq and a withdrawal from Afghanistan, beginning in July of this year, as likely to significantly reduce military spending. Year to date through September 9, the S&P Aerospace & Defense Index fell 9.9%, versus an 8.4% drop for the S&P 1500 Composite Index. The
sub-industry gained 13.2% in 2010, versus a 14.2% rise in the S&P 1500. --Richard Tortoriello
S&P Analyst Research Notes and other Company News
July 29, 2011UP 2.55 to 29.64... ERJ posts
.53 vs.
.32 Q2 earnings per ADS on flat revenue
(IFRS basis). Capital IQ consensus forecast was
.45. ERJ raises $5.6B '11
revenue guidance to $5.8B. S&P raises estimates, keeps hold. ...
July 29, 2011
02:11 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF EMBRAER (ERJ
29.39***): Q2 EPS of
.53, vs.
.32 (results in IFRS), is above our
.39 estimate
and consensus of
.45 from Capital IQ. Due to ERJ's outlook and an improving
aerospace cycle, we raise our '11 EPS forecast
.60 to $2.35, and '12's by
.55
to $2.55.We note that H1 orders are about in line with deliveries, and that backlog
of E-Jets is 261 aircraft, up by 11 from Q4 '10. However, given our view of ERJ's
historically volatile earnings results and risks we see in Brazil, we maintain our
12-month target price of $36. /RTortoriello
May 3, 2011
12:23 pm ET ... S&P MAINTAINS HOLD OPINION ON ADSS OF EMBRAER (ERJ
33.17***): Q1 earnings per ADS of
.58, vs.
.13 (results in IFRS), is above our
GAAP estimate of
.50 and consensus of
.37 from Capital IQ (an entity that
operates independently of S&P Equity Research). Despite Q1 beat, we are
trimming our '11 estimate by
.45 to $1.75 and '12's by
.45 to $2.00, on our view
of rising expenses due to a strong Brazilian Real.We continue to see a
commercial aviation recovery underway, but do not expect business jet recovery
to begin until '12. Given risk we see in our view of inconsistent EPS growth, we
retain our 12-month target price of $36. /R.Tortoriello
March 25, 2011
ERJ posts
.6782 vs. $1.8252 Q4 earnings per ADS (GAAP) on 21% lower net
revenues. For 2011, ERJ expects total net sales of $5.6B distributed as follows:
Commercial Aviation $3.1B, Executive Aviation $1.2B, Defense and Security
Business $600M, Aviation Services and Other Business $700M. ERJ also said
EBIT is expected to be $420M in 2011 and the EBIT margin is to achieve 7.5%.
March 25, 2011
12:31 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF EMBRAER (ERJ
33.0***): Q4 EPS of
.68, vs.
.81 (IFRS results), is above our
.42 U.S. GAAP
estimate, with difference mainly due to much lower tax rate than we expected.
ERJ sees a continued recovery in regional jets in '11, but a lack of a business jet
recovery. Though we expected business jet recovery in '11, we think recovery is
eventual and see ERJ results reflecting solid execution and strong product line,
offset by rising Real and wage inflation.We raise our '11 EPS forecast
.25 to
$2.20, and initiate '12's at $2.45.We lift our 12-month target price by $3 to $36, on
our '12 estimate. /R.Tortoriello
February 25, 2011
04:10 pm ET ... S&P MAINTAINS HOLD OPINION ON SHARES OF EMBRAER (ERJ
33.57***): ERJ is scheduled to report full year '10 results on March 25.We are
maintaining our EPS estimates of $1.55 for for '10 and $1.95 for '11. Although Q4
backlog declined 6% from a year earlier, it has begun to rise on a sequential basis
and net new orders have remained positive since Q2 of '10.We see ERJ
benefitting not only from rising commercial orders and increased deliveries of
business jets, but from regional demand for military aircraft. However, we view
the shares as fairly valued, and would not add to positions." /R.Tortoriello (S&P)