Q3/24; ON-TRACK & DEMONSTRATING ROBUSTNESS OF BUSINESS
THE TD COWEN INSIGHT
Decreasing target to $130 from $132 and maintaining BUY. Lower target entirely due to FX and higher shares outstanding. No change to our bullish thesis. We believe share price weakness presents attractive entry point that won't last. Q4 looks strong and there are plenty of growth drivers for 2025 and beyond. No reason to believe 2024/2025 guide isn't achievable.
Impact: NEUTRAL
Our forecasts are substantially unchanged with minor model and economic (FX) related updates. Q3/24 adj. EBITDA of $307 million ($316 million excl. Other expense) vs TD/cons: $308 million/$293 million.
The y/y decline in adj. EBITDA margin was due to cost inflation, supply chain disruption, SBC (rise in share price) and higher R&D. We do not believe the decline is concerning given one-time nature, supply chain related headwinds and unchanged 2024 guide which implies Q4 margin recovery to >16%. Excluding impact of Other expense, SBC (assume $11 million vs management indication of '>$10 million) and higher R&D, without factoring in supply chain impact, adj EBITDA margin was 16.2%, up 50 bps y/y - more logical (in our view) when considering benefit of increased service and large cabin aircraft revenue.
Aftermarket revenue growth was an exceptional 28%, the highest of public comps (GD +16%; TXT +5%), and is expected to continue to grow through 2026 based on increase in installed base, market share gains, and aging in-service fleet. We forecast aftermarket revenue growth of 4% in 2025/2026, and believe the segment can outgrow industry through 2030.
Good quarter in our view. Share price weakness surprises us, but could be attributed to historical precedents (sell on report, and rebound over following days), concern over what we characterize as insignificant FCF difference vs consensus or the y/y margin decline (see discussion above). We believe these factors will become irrelevant over coming weeks/ months and the market will return its focus to the low valuation, deleveraging, growth potential, increasing revenue diversification and earnings stability/predictability.
No change to management outlook. Order activity is solid across most regions and pricing robust. Flight activity on BBD aircraft (+51% vs. 2019) is healthy. BBD is trading at 8.1x fwd adj. EBITDA, below our 8.5x target, comps at 11.2x, and its trailing 5-year avg of 9.6x despite significant structural improvements to its business.