Here's an article that relates to LUNN/TPG directly:
Money Daily
Wednesday, October 22, 1997 8:30 p.m. EDT
Boeing suffers from its own success
But strong demand for aircraft - and aircraft supplies
- bodes well for the long-term health of the sector
by Michael Brush
A lot of companies would like to have it so bad.
Citing problems in keeping up with excess demand for
aircraft, Boeing (NYSE: BA) said Wednesday it will
take a $1.6 billion charge and report a third quarter
loss this Friday. Analysts had been expecting the
company to report earnings of 47 cents. Boeing's stock
suffered, losing 4 1/8 points to close at 49 7/8.
Boeing's problem: Because of the strong demand, it has
run short of raw materials and parts, and it has had
trouble keeping up with production targets as it adds
thousands of new employees.
Boeing received record orders for over 700 aircraft
last year, and is trying to boost production from 23
planes a month in early 1997 to 43 a month early next
year. A few weeks ago, it said it will stop making
737s and 747 jumbo jets to clear bottlenecks and
resolve parts shortages.
This year's $1.6 billion charge isn't the only hit
Boeing will take. The company says it will have to
take another $1 billion write off next year to account
for late deliveries and material shortages. Meanwhile,
federal regulators are making precautionary
inspections of Boeing factories, although the the
Federal Aviation Administration says it has not been
alerted to any safety violations.
Despite the difficulties caused by too much demand,
some analysts see Boeing's price dip Wednesday as a
buying opportunity - precisely because aircraft orders
are so strong. One is Wolfgang Demisch, of Bankers
Trust New York Corp. He warns the stock may tread
water in the short term because of the problems in
keeping up, but he likes it as a long term holding.
The analyst community overall seems to agree. As of
the close of business Wednesday only one of the
fifteen analysts covering Boeing had lowered
recommendations, according to First Call's Chuck Hill.
Four of the fifteen, however, had lowered estimates
for next year to $2.56, from a consensus mean of
$3.24.
If those kinds of downward revisions have you nervous
about Boeing, consider another way to take advantage
of excess demand for aircraft: Invest in suppliers to
Boeing and Airbus, the other remaining large aircraft
producer.
What are some of the suppliers to consider?
One is Honeywell (NYSE: HON), according to Jeffrey
Sprague, an analyst with Cowen. Not only will
Honeywell benefit from the increase in the number of
planes in production, but revenues are growing because
the company is increasing the amount of content it is
putting in them, says Sprague. One of those products
is a flight management system designed for the new
Boeing 777 which will be used in other planes as well.
Honeywell also makes a popular flat panel display used
by both Boeing and Airbus. True, Honeywell gets only
about a fifth of its earnings from supplying the
aircraft industry. But rapid growth in this sector is
what is driving the company's performance. Sprague
says the stock will reach $90 within a year.
A Cowen report also recommends United Technologies
(NYSE: UTX), which makes engines for the companies
that produce aircraft. In addition to benefiting from
growth in the aircraft sector, United Technologies
will also improve earnings by boosting margins through
a restructuring program. The company is also selling
relatively cheap -- trading at a 1998 price earnings
ratio of about 17, or around 25% below competitor GE,
even though it has comparable earnings per share
growth.
If you like smaller cap companies, consider Kaynar
Technologies (NASDAQ: KTIC) which makes fasteners used
in aircraft, says Joel Tiss, an analyst at Lehman
Brothers who covers airline industry suppliers.
"Suppliers like Kaynar can't deliver their stuff fast
enough to keep up with Boeing's demand," says Tiss.
Kaynar gets about 40% to 50% of its revenue from sales
of its fasteners to aircraft producers, says Tiss, and
about 70% from the aerospace industry overall. It also
supplies the auto, electronics and other industries.
However you choose to play it, demand for aircraft
(and aircraft supplies) is likely to stay strong for
several reasons, analysts say. For one thing, demand
at commercial airlines is strong, and world traffic is
growing -- at about 6% to 7% in 1997. Solid profits
and cash flow at airlines mean they will continue
ordering additional aircraft. What's more, recent
increases in noise and emission standards for planes,
combined with the aging of fleets, will help as well.
"Boeing's backlong is two and a half to three years,
so it is going to be a while before growth slows down
for the suppliers," says Tiss. "They each have fixed
costs, and the more they pump through that fixed cost
base, the more profits they make." |
