Aerospace Trio: Cabins and Cockpits

09/28/2016 8:00 am EST

Focus: STOCKS

George Putnam

Editor, The Turnaround Letter

With only two primary customers — Boeing and Airbus — commercial aircraft component suppliers must produce innovative products at competitive costs while providing outstanding execution, explains George Putnam, editor of The Turnaround Letter.

Some suppliers have struggled, and their share prices reflect this. We are optimistic about overall industry demand, which should provide a tailwind to companies that need to step up their game. 

We think the companies below are making good strides to adjust to the new environment.

Astronics (ATRO) builds cabin and cockpit lighting systems, airliner seat power systems and other commercial and military components. 

Aerospace results have been good, but investors have been turned off by a sharp decline in its ancillary semiconductor test equipment business.

Results will need to improve or management may need to consider more strategic options.  Either outcome is good for shareholders. 

Astronics shares remain nearly 40% below their prior highs of only a year ago. Valuation is reasonable at 10x next year’s EBITDA.  Continuing strength in the aerospace business and some resolution in the test segment should help propel Astronics shares.

As the world’s leading producer of cabin equipment, including seating, galley and storage gear, Florida-based B/E Aerospace (BEAV) is benefitting from its strong positions on Boeing and Airbus planes and rising market share in the galley-related segment. 

However, investors are concerned about the potential for weaker airline production and retrofit orders as well as the reality of shrinking business jet and helicopter orders. 

With its reasonable 10.7x EBITDA valuation, strong cash flow and likely improvement in results, B/E Aerospace shares look attractive.

Maker of commercial and military jet cockpit controls, sensors and advanced materials, Seattle-based Esterline Technologies (ESL) has stumbled. 

The company has often missed its own financial targets, leading investors to question the capabilities of its once highly-regarded CEO Curtis Reusser, who joined in 2013 to turn things around.  However, Esterline’s problems were deeply embedded and have taken time to fix. 

Esterline is a high-quality company – its components are used on virtually all Boeing airliners, many of Airbus’ commercial jets and the advanced F-35 Joint Strike Fighter. 

Esterline shares remain well-below their early-2015 levels and look like a good long-term investment. 

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By George Putnam, Editor of The Turnaround Letter

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