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Alcoa Continues Swoon, Revises Aerospace 2016 Outlook to 6%-8% Expansion

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Image Source: Boeing; image source: Alcoa Alcoa (AA) kicked off first-quarter 2016 earnings season April 12, but nobody reading our work should have much interest in shares. Our $10 fair value estimate for the company explains the lack of opportunity, and we laid in out in no uncertain terms in April 2015 that we thought, “The Time to Consider Owning Alcoa Has Passed.” Even a few months before that write-up, we said the aluminum giant was trading at a peak multiple on peak earnings, a classic valuation “no-no,” and since that time, shares of Alcoa have fallen more than 40%, “Alcoa Kicks Off Fourth Quarter (2014) Earnings Season:” From our Jan 13, 2015 article: Would we ever considering owning Alcoa … Read more

Giddy Up – It’s Earnings Season!

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By Brian Nelson, CFA During the trading session January 27, Apple (AAPL) failed to turn the tide of a disappointing fiscal 2016 first-quarter report (calendar fourth-quarter), “Apple Will Go Lower…And It Will Be ‘Forced’ Into Acquisitions,” and coupled with a Fed statement, where the Committee left interest rates unchanged, as expected, many market observers read between the lines and hit the sell button. On the basis of some of the concerns we’ve outlined, “Not Doom and Gloom – But Just Cautious,” we can completely understand the hesitancy by participants to stay fully exposed to this tumultuous equity market. In many ways, that the Fed has hit the brakes just a few weeks after the long-anticipated rate hike means the global … Read more

Surveying the Aerospace Arena

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The reasons for liking commercial aerospace, or constituents involved in the production of commercial aircraft, are many and varied. The liberalization of air travel between global point-to-point markets has facilitated expansion in not only leisure travel but also business travel between countries. The advent of the low-cost-carrier model in the likes of Southwest (LUV) and others just like it around the globe has made air travel affordable to those that it once had “priced out.” The growing middle class in developing countries has paved the foundation for continued passenger growth, something that should be expected for decades to come. The collapse in jet fuel costs has made the global airline industry, or those involved in the transporting of people from … Read more

Bellwether Snapshot: Walmart, Boeing, CSX

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Alcoa (AA) kicked off third-quarter earnings season with a wimper, which had been preceded by Yum! Brands’ (YUM) doozy of a showing. Incremental news impacting the expected performance of Walmart (WMT), Boeing (BA), and CSX (CSX) hasn’t been great either. Investors continue to write off weakness as “normal,” even “macroeconomic” as if it doesn’t matter, pointing to the transient nature of a struggling global economy suffering from a slowdown in the pace of growth in China and weakness in export-dependent countries, not the least of which is Brazil, as somehow a “good thing,” but it may not matter. The trajectory of expectations of future free cash flow generation is being impacted, and so are fair value estimates as a result, … Read more

Buffett Planning to Scoop Up a Valuentum Favorite

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We’re hearing that Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) is nearing a deal to buy one of our favorite commercial aerospace suppliers and former Best Ideas Newsletter holding Precision Castparts (PCP). We’ve always been fans of Precision Castparts and believe its management team is one of the best in all of the industrial sector. This was likely something that convinced the Oracle that Precision Castparts was right for the Berkshire portfolio. As we’ve yet to hear specific deal terms, we believe Berkshire can pay up to $34 billion in equity value, or ~$240 per share and still make this deal work from an economic-value standpoint. Precision Castparts’ shares closed at ~$194 each Friday. We expect aerospace suppliers to catch a … Read more

Commercial Aerospace Flying High

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Valuentum’s President Brian Nelson talks about the resiliency of the commercial aircraft making business and the massive backlogs that offer a nice tailwind to the supply chain. Source of Images: Boeing (BA), Randy Tinseth (20-year Current Market Outlook, July 2014). If you cannot see the video, please click here. Aerospace Suppliers: AIR, AIRI, AL, ATRO, COL, HEI, HXL, ISSC, PCP, SPR, TATT, TDY, TXT Airlines – Major: AAL, ALK, DAL, JBLU, LUV, SAVE, UAL

Gearing Up for 2015 Outlooks

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Though the firms below aren’t included in the newsletter portfolios, we keep a close eye on them should an opportunity ever present itself. Not only are they fantastic companies with strong business models, but they also provide insight into the broad industries in which they operate. With only a couple weeks left in 2014, management teams are actively preparing their budgets for 2015. Let’s have a look at what a few bellwethers have been saying about their outlooks for next year. Industrial Bellwether 3M (MMM)  The maker of Post-it notes has become the poster child of aggressive dividend growth policy as of late. Having traditionally raised its dividend a penny or two per year in the past, 3M upped the … 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