TD: Abot the Biz jet industry health Key Takeaways from Business Jet OEM Q3/23 Reports
TD Investment Conclusion
Key business jet OEM's reported Q3/23 results over the past two days. Results are most relevant for Bombardier (100% of revenue), followed by CAE, Hroux-Devtek, and Magellan. Demand is holding up better-than-expected during a period in which we had been anticipating that economic headwinds and normalization in orders would lead to slower/nil backlog growth. The challenging supply chain environment remains and is impacting deliveries, although conditions are improving. Book-to-bill ratios in Q3 were strong at 1.3-1.4x, which, combined with already robust backlogs, supports our underlying assumption that delivery growth will continue through at least 2025. We do not believe business jet market indicators are catalysts for MAL, HRX, or CAE, but we think recent data points should be a positive catalyst for Bombardier's share price, and show that recent weakness is unwarranted.
Q3/23 Revenue: GD Aerospace (Gulfstream) revenue decreased 13% based on a 23% decline in deliveries (in-line with expectations) due to supply chain, partially offset by higher services revenue (8%) and pricing. Textron Aviation (Cessna) revenue increased 15% based on higher total deliveries (business jet deliveries were flat), pricing (net 3% benefit after inflation), and services growth (3%). This morning, Bombardier's Chairman was quoted in the media as saying that the company would meet 2023 delivery guidance (138).
Delivery Outlook: As widely expected, Q3/23 deliveries were lower-than-expected at the start of the year due to supply chain constraints. GD has lowered fullyear delivery guidance to approximately 133-135 aircraft (from initial guidance of 145). Textron 2023 deliveries now appear to be approximately 175-180 (from 200 originally). New delivery guidance implies full year growth of 12% and 0%, respectively, for GD and TXT (TD BBD forecast: 12%). For 2024, we believe a portion of delayed deliveries will be recovered leading to industry growth of approximately 15%.
Supply-chain Challenges: Supply-chain challenges are expected to improve heading into 2024. We believe that Bombardier investors should be reassured by the company's management of supply chain challenges, and approach to setting delivery expectations for the year.
Book-to-bill and Order Outlook: GD Q3 Aerospace book-to-bill was 1.3x (1.5x at Gulfstream). Cessna book-to-bill was 1.4x, with the large NetJets agreement not having a material impact. B-to-b at Cessna was the highest since Q3/22 and at Gulfstream since Q2/22. Book-to-bill ratios for Gulfstream and Cessna have been biased higher due to delivery delays, a fact that could continue to result in slightly lower ratios for Bombardier. Q3/23 industry orders support our expectations for Bombardier's 2023 FCF and believe it could lead to further debt repayments. Cessna indicated that pricing for new orders remains strong, and that macroeconomic headwinds have not impacted demand or cancellations.