RBC Capital Markets hosted an Aerospace & Defense bus trip for investors in Philadelphia and New Jersey, visiting Precision Castparts Corp. (NYSE: PCP), Triumph Group Inc. (NYSE: TGI), The Boeing Co. (NYSE: BA) and TransDigm Group Inc. (NYSE: TDG).
In terms of overall themes, we noted continued confidence in the commercial aerospace outlook, some potentially misguided optimism over the U.S. defense budget and some leveling off in the general industrial area, said Robert Stallard, an analyst at RBC Capital Markets.
The aerospace companies that Stallard met continue to project solid growth in both the original equipment manufacturer (OEM) and aftermarket segments.
He said there have been no signs of a slow down in the shorter lead time aftermarket, while increasing build rates are flowing down the supply chain and pushing up parts volumes.
Precision Castparts was particularly confident about its ability to further gain share, having just signed an increased long term agreement for fasteners with Boeing. Boeing has also been talking to suppliers about what it would require to take the 737 production to 60 per month, he said.
Boeing is by no means alone, but he believes management from its defense division may be too optimistic in thinking that there will be no reductions to the U.S. defense budget.
Although with a looming $500 billion sequester, a number of executives commented that they expect subsequent U.S. legislation to override the debt ceiling deal and keep defense spending flat.
Stallard is concerned that the U.S. defense industry could be less than prepared for spending cuts if the management does not expect them to occur.
Although the Primus deal is set to bring Precision Castparts Fastener's general industrial exposure to less than 20 percent of sales, he thought it was notable that management has seen a slow down in this market over the last month. Demand has started to level off for these lower margin products.
Our meetings with the management teams have reinforced our overall stance on the sector, which remains overweight on aerospace, and market weight on defense. Our preference is for higher quality, higher growth companies, with Precision Castparts and TransDigm as our Top Picks, said Stallard.
However, if there is a continued short term recovery rally in the equity market, this is likely to favor names that have been beaten up in the summer sell-off, like Textron and Spirit, he said.