BA

Three Huge Red Flags for the Airlines, Hotels

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The airline industry is a good barometer of global economic activity as it not only gauges leisure travel but also business activity. We picked up three important red flags recently that may weigh on shares of the airline group (and by extension the hotel space). For those that don’t know us, we’re not at all fans of the investment prospects of the airline industry, but nonetheless, we pay very close attention to airlines for unique economic insights. Read about our recent call on cyclicals here, in case you missed it. 1. Ebola. According to CNN, the first case of Ebola has been diagnosed in the US. Just like the SARS and West Nile virus before it, the news will likely … Read more

There’s No Space Like Aerospace

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The recovery from the stock-market bottom in March 2009 has been five years in the making, but as the cyclical threat of an eventual global downturn looms, the aerospace industry is one of the few industries that we think will continue to be resilient in the face of such pressures. We expect commercial aircraft build rates to continue to climb at least through 2018. If the multi-year backlogs of unfulfilled deliveries at the large airframe makers aren’t enough, Boeing’s (BA) updated 20-year outlook for commercial aerospace demand, released June 10, was about as rosy as can be. The reason for such a long-range view has to do with the nature of aircraft building. When airframe makers build next-generation aircraft, they … Read more

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

Perhaps Nothing Stronger Than Aerospace

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In the world of investing, the strength of the industry in which a firm operates is sometimes as important as the company itself. A strong industry backdrop offers the potential for fundamental upside as the industry revenue pie grows. Said differently, it is much easier for a firm to do well in an expanding industry, where both the industry’s revenue pie is growing and market share opportunities are available, than it is for a firm to do well in a shrinking industry, where it may have to battle entrenched competitors in a pricing death match to gain share. Though commercial aerospace will always be cyclical (as it relates to order trends) and pricing competitiveness will always be present, the massive … Read more

Thank you…

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By Brian Nelson, CFA Earlier this week, I received an email from a colleague and valued member of our services. I wanted to share it here for others to read. I haven’t included his name, but if he wants me to, I can add it in. It is filled with wisdom, experience and kindness. And it really made my year to read his words. The Valuentum community, I believe, is the best community of investors out there. Sir, if you do happen to read your own email on our site, we very much have appreciated your feedback, and we hope to continue to live up to your praises. We are dedicated, and our team has been rejuvenated by your words. … Read more

Evaluating the Outlook for Defense Stocks

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The defense industry is home to a number of large defense contractors—General Dynamics (GD), Lockheed Martin (LMT), Northrop Grumman (NOC) and Raytheon (RTN)—that have significant project/intellectual know-how, long-term customer/government ties, and widespread integration expertise that cannot be easily replicated by many smaller contractors. This gives established, large defense contractors a leg up on bidding for new government contracts and optimizing the margin profile for many through cost cutting and productivity enhancements. Still, competing budget priorities within the overall US budget and within the US defense budget itself will pose both challenges and opportunities for much of the group. However, long-term cybersecurity and national security risks aren’t going away, and this will ensure that the group has a steady share of … Read more

Boeing’s Fourth-Quarter Results Were Disappointing But We’re Not Worried about the Strength of Commercial Aerospace

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On Wednesday, aerospace and defense bellwether Boeing (BA) reported relatively disappointing fourth-quarter results. Revenue advanced 7% in the period, but core operating earnings were flat versus the prior-year quarter due to a 50 basis-point headwind in its core operating margin. Our experience with Boeing is that the firm tends to face share-price pressure when financing or emerging-market scares become prominent, the latter taking center stage in recent days—the Argentine peso collapsed and the South African rand continues to face pressure due to an unexpected rate hike. News about China—including a slowdown in manufacturing, banking concerns, and a sizzling (but more vulnerable) real estate market—isn’t helping either. Boeing is more exposed to these “news” items than most companies, particularly given the … Read more

Boeing Sets Records for 2013; Aerospace Thesis Remains Intact

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Boeing (BA) revealed the tremendous strength of global commercial aerospace demand in a news release Monday. During 2013, the aerospace giant noted that it delivered a record 648 commercial deliveries, received a record 1,531 gross commercial orders for the year, and posted a record 5,080 units in its backlog of unfulfilled orders at the end of 2013. The 1,355 net commercial order mark for the year was the second-largest in company history. Boeing continues to execute well on its production rate increases, and three of its programs set records for deliveries during the year: the 737 program, the 777 program, and the 787 Dreamliner program. 2013 was a fantastic year across the board for Boeing and for much of the … Read more

The Dichotomy of Airlines and Aerospace

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On Monday, top insurance idea AIG (AIG) announced that it would sell International Lease Finance Corporation (ILFC) to aircraft leasing firm AerCap Holdings (AER) for $5.4 billion, consisting of $3 billion in cash and the balance in newly-issued AerCap common shares. Though we think ILFC was one of the crown jewels of AIG’s business particularly considering the prospects for global air travel demand in coming years, the price is fair and opportunistic, especially since AerCap is risking its investment-grade status to facilitate the deal. We don’t think better terms could have been had by either party, given financial constraints, and shares of both entities are moving higher on the news. The combined AerCap-ILFC will be #2 on the world stage … Read more

Surveying 3Q Performance from the Large Defense Contractors

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Northrop Grumman Executes Nicely in 3Q But Reveals Declining Backlog On Wednesday, Northrop Grumman (NOC) reported strong third-quarter results considering the competing budget priorities in Washington and the subsequent difficult revenue environment. The defense contractor’s revenue dropped 2.6%, as expected, but its segment operating income increased 4.5% thanks to roughly 90 basis points of segment operating margin improvement. Third-quarter diluted earnings per share leapt 17.6%, and free cash flow swelled to $860 million (14.1% of sales), up from $748 million (11.9% of sales). We very much liked the profitability improvements and its increased free-cash-flow conversion during the period, but the firm’s backlog performance in the quarter wasn’t stellar: As of September 30, 2013, total backlog was $37.5 billion compared with … Read more