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Strategies & Market Trends : Three Amigos Stock Thread -- Ignore unavailable to you. Want to Upgrade?

To: wizzards wine who wrote (9708)	10/21/1998 5:21:00 PM
From: Sergio H	Respond to of 29382

<sector is aerospace and Bear Confirmed> Preston, I bought Gulfstream (GAC) because the biz jet sector is red hot and I thought that the Co. made a brilliant move in acquiring K C Aviation earlier this year. There are a lot of stocks clumped under the aerospace umbrella that are experiencing fabulous growth within aerospace subsectors. They've found a niche and are flourishing. I currently own four of these stocks. GAC, CADE, ATPX and BBDa.TO Based on your P& F reading, I'm going to set protective stops on GAC. GAC is up about 30% for me in the last few weeks and it received another push up today from this article from www.iionline.com: Update: Gulfstream Humming at 10,000 Feet Gulfstream Aerospace (NYSE: GAC) has treated investors to yet another positive earnings surprise. Third quarter revenue increased 35%, to $626.2 million, while earnings per share soared 91%, to $0.86, after adjusting 1997 results for tax benefits. Gulfstream, which makes corporate jet aircraft, was profiled as our stock of the day on Sept. 28th. Included in the top-line results is $35 million from the recently acquired KC Aviation division. Third quarter revenue exceeded our forecast by 20%, while EPS blew away consensus estimates of $0.80 and our estimate of $0.76. Management reiterated its internal forecasts of $2.95 in 1998 and $3.75 in 1999. We think earnings for this year will be closer to $3.06 per share, and $3.87 for next year. A $4.00 per share figure for next year, though, is more likely, but we'll remain conservative for now. The most impressive results from the quarter occurred below the top-line. Besides adding $35 million in sales, the KC acquisition helps to alleviate capacity constraints in the finishing area. Gulfstream used to outsource most of its aircraft completion functions, but was able to finish 16 planes (five non-Gulfstream related) during the quarter, a sharp improvement from last year when five aircraft were completed. Expanding Margins A redesigned manufacturing process along with the newly-added completion capabilities led to another sharp improvement in gross margin, which came in at 24.1% (excluding pre-owned aircraft and inventory step-up charges from KC acquisition), up from 19.3% last year and 22.6% in the second quarter. The company is well on its way to hitting its goal of gross margins in the mid-20s by the end of the year. Operating leverage over the company's fixed cost structure lead to a 350 basis point improvement in operating margins to 16.5%. In all we are very pleased with the positive progress in improving margins and alleviating capacity constraints. Order rates and deliveries continue to show very good trends. Gulfstream received orders for 16 new planes (6 GIV-SPs and 10 GVs), a sharp increase from six ordered last year. Year to date Gulfstream has taken orders for 58 new planes compared to 33 during the same period last year. The company delivered 16 aircraft (9 GIVs, 7 GVs) versus 14 last year (6 GIVs, 8 GVs), and has reported no cancellations to date. Backlog, including the Middle East Shares contract and options, stands at 138 planes valued at approximately $4.2 billion. During the quarter Gulfstream also completed its share buyback program. In all the company purchased 5.5 million shares at an average price of $35.81 per share, for an aggregate amount of $198.5 million. The repurchase has put a temporary strain on cash, which now stands at $10.6 million, but we are confident that the number will climb now that the buyback is complete. The company also paid down another $6.2 million in long term debt bringing the total to $373.8 million. Debt to equity continues to trend toward acceptable levels, coming at 290% for the quarter versus 410% last year. Warren Buffett and Executive Jet The continued success of Executive Jet's (EJI) fractional shares program dispels some fear of slowing global economies. The Warren Buffett-owned EJI is experiencing explosive demand for time sharing of corporate jets. The company started the year with just two aircraft, but now has 170 in its fleet showing the explosion in demand for its program. According to Buffett, "(time sharing of corporate jets is) clearly a field that is going to explode over the next decade". The program alleviates some of the cyclicality inherent in selling a $38 million new aircraft. Richard Santulli, EJI's founder, feels that slowing economies will not impact time sharing, as "large corporations might also realize they can save a lot of money by selling a used jet and buying a share of one instead". This emphasizes a point we made in an earlier piece on Gulfstream that the fractional shares program may run counter-cyclically to the company's traditional business, and help mitigate a slowdown in the purchase of new planes. Confirming the acceleration in EJI's business is an order placed today, which Gulfstream CEO Theodore Forstmann claims "is by far the largest order in our history". EJI placed an order for 12 planes with an option for 12 more valuing the contract at $1.3 billion. Given EJI's history for completing orders with Gulfstream, Forstman is very confident that the full amount of the contract will be completed. Gulfstream will begin delivering these planes in 2000, and will continue through at least 2006. Gulfstream shares continue to carry a multiple well below the S&P 500. Based on our conservative estimate for 1999, of $3.87, the shares are valued at 11 times next year's earnings. The forward multiple represents a steep discount to the 32% increase in earnings we forecast for next year (using management's internal estimate of $2.95), and well below the 94% growth in earnings achieved through the first nine months of the year. Gulfstream management continues to be very optimistic about its outlook. The recently completed KC acquisition is going to be extremely accretive, order rates are at all time highs, margins continue to expand and earnings momentum is clearly at the company's back. Yesterday's large order from EJI confirms the positive outlook. Bottom Line: Backlog and order rates are the most important measures of Gulfstream's future business, and both measures show very positive trends. We continue to strongly recommend purchase of GAC shares. Analyst: Chris Bulkey (10/20/98)