Our view: Last week we had the opportunity to present to Exchange’s Board of Directors in Arizona and received updates from key business leaders on the company’s strategic direction. Overall, we came away positive on the company’s outlook, especially in Aviation, reflecting the strong pipeline of contracted growth and numerous upside opportunities, in addition to solid execution. While we remain cautious on the manufacturing outlook despite commentary from mgmt they are seeing early signals the backdrop is improving, we view the segment as having significant operating leverage when macro inflects. Continue to flag Exchange as a top idea in Aerospace.
Key points:
Q3 above. EIF reported Q3 adjusted EBITDA of $193MM, ahead of consensus $187MM (RBCe: $190MM). See Exhibit 1. Key highlights from our conversation with management and presentation to the Board:
• Board of Directors presentation. Last week, we presented to Exchange’s Board of Directors and received updates from Kevin Hillier, President at Carson Air, Jake Trainor, CEO at PAL Aerospace, and Jason Glatt at Quest Windows. We were impressed with the leadership team, and we gained a greater insight into Exchange's distinctive culture, which we view as an important differentiator. We believe this culture is an essential element that sets EIF apart and has fueled its success over the last 20 years.
• 2025 guide above expectations. Management guided to 2025 EBITDA of $690MM to $730MM on its earnings call, which at the midpoint was above consensus coming into the quarter of $693MM. Important from the call was commentary that the guidance does not include a robust recovery in manufacturing, in line with our cautious view on the industrial backdrop. We therefore see upside should macro inflect and flag numerous upside opportunities, including potential ISR and Medevac contracts.
• Valuation does not appropriately reflect the opportunity in Aerospace and upside optionality in manufacturing. While Exchange is diversified and does not have an obvious set of publicly traded comparables, we believe strong execution, recent contract wins, and high barriers to entry warrant a higher multiple in the company's Aviation segment. While we see risk to the industrial outlook, we do not believe Exchange's growth set (+11% EBITDA CAGR 2024-26) is appropriately reflected in the shares trading at 6.9x NTM consensus EV/EBITDA. See Exhibit 3.
Our view on the stock. Our 2025E Adj. EBITDA moves up slightly to $700MM (from $689MM) due to M&A but toward the low-end of mgmt's guide for EBITDA of $690MM to $730MM reflecting our more cautious view on macro (consistent with estimates across our coverage). Our blended target multiple moves higher to 7.4x, from 7.1x, to reflect strong execution, recent wins, and numerous growth opportunities in Aviation. Our PT moves to $71 (from $65), which represents a >30% implied return. Maintain OP.