Desjardins With Aerospace and Defence stocks are “on fire,” Desjardins Securities analyst Benoit Poirier thinks Hroux-Devtek Inc. “still has more room to run” ahead of the release of its fourth-quarter results on May 22.
He is currently projecting quarterly sales for the Quebec-based landing gear manufacturer of $171-million, EBITDA of $26.1-milllion and earnings per share of 30 cents, falling in line with the consensus projections of $172-milion, $26.5-million and 30 cents, respectively.
“In our view, the Street’s numbers are appropriately calibrated and we would be buyers ahead of the quarter despite the 27.8-per-cent year-to-date run-up in the stock.” said Mr. Poirier. The Street is forecasting only an $8-milllion quarter-over-quarter revenue increase, which is below the five-year average bump of $12-million quarter-over-quarter (recall that 4Q has been HRX’s strongest quarter seasonally). The Street is forecasting margin expansion of 40 basis points quarter-over-quarter, also below the five-year average of 100 bps. Moreover, 3Q EBITDA margin of 15.0 per cent (which beat consensus of 13.3 per cent) was unfavourably impacted by FX fluctuations (totalling negative $0.6-million). Stripping this out, EBITDA margin would have been 15.4 per cent.”
Mr. Poirier also said the company was “vocal” on its third-quarter conference call as well as at the firm’s recent Montral Conference that it sees upside above the historical EBITDA margin range of 15–16 per cent.
“The signs are even more positive across the A&D industry,” he said. “Among HRX’s supplier peers that have already reported results, nearly all players beat consensus, eight of 13 increased guidance and the average one-day stock price reaction to the results was 4.5 per cent. The sector is clearly on fire as supply chain issues are beginning to ease and civil/defence demand continues to ramp up. The OEMs also reported positive developments. Boeing unveiled two new contracts that will benefit HRX (F/A-18 and MQ-25), Airbus now targets a rate increase on the A350 to 12/month by 2028 (up from 10/month by 2026; positive read-through for future 777X wide-body demand, although EIS could slip into 2026, according to Emirates and Lufthansa), and WSJ reported that Embraer is planning a new B737/A320-sized plane (opportunity for HRX).”
Reiterating his “buy” recommendation and $26 target (versus the $24.50 consensus) for Hroux-Devtek shares, Mr. Poirier said he does not think “sentiment is overly hot, as HRX is trading at only 8.5 times EV/EBITDA FY2 (FY25), which is a 7.7 times (or 47-per-cent) discount to the average EV/EBITDA FY1 multiple for its A&D supplier peers of 16.2 times.
“We also see more upside following a number of aerospace transactions at elevated multiples (12–13 times) in recent months,” he added. “Also, the recent IPO of Loar Holdings (niche US A&D component supplier; US$4-billion market cap) opened at US$45/share (above expectations of US$24–26/share). Loar is up 14.2 per cent since then and is now trading at a whopping 42 times estimated 2023 EBITDA, demonstrating the continued demand for reputable aerospace assets and the relative attractiveness of HRX’s cheap valuation.”