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B/E Aerospace (BEAV): Margins Could See Upside Bias

 March 14, 2012 06:02 PM

The margins of B/E Aerospace, Inc. (NASDAQ:BEAV) could increase in the coming quarters as the strong demand for commercial aircraft and consumables segments bodes well for the company.

B/E Aerospace is one of the largest manufacturers of cabin interior products for commercial aircraft and business jets, and the acquisition of Honeywell's distribution business has made it the largest distributor of aerospace consumable products as well.

In the recent investor day, the company highlighted Seller Furnished Equipment (SFE) wins and these products such as the Sky Interior system and Lavatory systems will now be standard issue on the 737. Of the $8 billion in the backlog, about $4.4 billion is from SFE.

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The company does not expect the SFE increase in the mix for Commercial Aircraft Segment (CAS) to be dilutive to margins. Over on the consumables side (CMS), the company noted that it still has not seen order size from customers grow significantly.

"Looking at margins across all three segments, we think there is plenty of upside," RBC Capital Markets analyst Rama Bondada wrote in a note to clients.

The analyst airline and OEM customers tend to favor bigger order lots when there is a concern that the supply of some fasteners or parts may become scarce due to industry-wide demand.

However the topline in CMS is expected to grow double digit based on 4 percent global airline capacity growth and market share gains.

"CMS margins tend to be volume driven and we therefore expect modest margin expansion over the next few years," Bondada said.

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The company remains bearish on bizjets but bullish on large cabin bizjet and super-first class demand.

Meanwhile, the CAS has historically had a more than 50 percent of sales from aftermarket but this is expected to slip below 50 percent over the next few years as SFE sales grow from $100 million in 2011 to $400 million by 2015.

"In our view this estimate will likely prove to be conservative given the potential wins that BEAV can gain on its numerous non-seat related offerings that it has developed over the years, particularly oxygen systems, galley systems and water systems," Bondada added.

The analyst noted that B/E Aersopace is seeing the transformation from a high beta stock reliant on cabin retrofit work and subsequently cash-on-hand at airlines, to a more balanced, lower beta stock that is tied to OEM production and non-discretionary airline fastener usage.

"This should result in lower risk and less cyclical volatility for investors, which coupled with strong growth, should continue to drive the stock higher," said Bondada, who has an "outperform" rating and $56 price target on B/E Aerospace shares.



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