Wall Street Transcript Interview with Kenneth Herbert, Senior Vice President of Equity Research at Wedbush Securities: Cybersecurity, Unmanned Systems Offer Opportunities as Defense Faces Budget Uncertainty

Wall Street Transcript

67 WALL STREET, New York - November 13, 2012 - The Wall Street Transcript has just published its Industrial Equipment, Aerospace and Defense Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Commercial Aviation and Energy Expenditures - Industrial Restructuring - Emerging Markets Penetration - Heightened M&A Activity - Future Growth and Market Share Gains - Increased Commercial Aircraft Production Rate - Defense Budget Uncertainty - Growth Opportunities in Data Security -

Companies include: Boeing Co. (BA), Precision Castparts Corp. (PCP), Rockwell Collins Inc. (COL), TransDigm Group Incorporated (TDG), Triumph Group Inc. (TGI), Spirit AeroSystems Holdings In (SPR), Hexcel Corp. (HXL), Esterline Technologies Corp. (ESL), LMI Aerospace Inc. (LMIA), Curtiss-Wright Corp. (CW), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), Raytheon Co. (RTN), General Dynamics Corp. (GD), BE Aerospace Inc. (BEAV) and many others.

In the following excerpt from the Industrial Equipment, Aerospace and Defense Report, an expert analyst from Wedbush Securities discusses the outlook for the sector for investors:

TWST: Please give us a quick idea of what you are covering in this space. It's a rather large and disjointed area.

Mr. Herbert: I tend to focus on companies with more commercial aerospace exposure, but most of the companies that I cover do have defense and business jet and broader exposure. A few of the companies I cover include Boeing (BA), Precision Castparts (PCP), Rockwell Collins (COL), TransDigm (TDG), Triumph Group (TGI), Spirit AeroSystems (SPR), Hexcel (HXL), Esterline (ESL), LMIA (LMIA), Curtiss-Wright (CW) and a few others.

TWST: So it's kind of a broad spectrum then.

Mr. Herbert: Exactly.

TWST: Please start from the top down. We keep hearing about the upcoming sequestration and the effects it's going to have. What does this mean if it happens in January as it's scheduled?

Mr. Herbert: That means a fairly significant impact. I think a lot of companies would generally agree that they are looking at probably a 5% to 10% reduction relative to current expectations for their military business, if you do. In fact, have a situation where sequestration takes place. So certainly it would be a near-term as well as a long-term impact.

Keep in mind, however, we are operating under a six-month continuing resolution now, which is limiting spending options. More importantly, however, the risk of sequestration has taken on a larger impact due to complete uncertainty that it has injected into the markets and investors' outlooks.

TWST: In general, what are the companies focusing on?

Mr. Herbert: I would say the companies are focused in a few areas. First, sequestration is currently the law of the land, so companies are working to ensure investors that they are planning accordingly. Having said this, I would argue that companies are limited in what they can plan for due to the uncertainty as to exactly how it would be implemented.

Moreover, it must be mentioned that even the Department of Defense, DoD, has been vague in their guidance on how companies and markets should be thinking about the risk of sequestration, partly operating under the assumption that it would be such a negative scenario, there is no way that it could actually happen.

TWST: So stay tuned.

Mr. Herbert: Exactly.

TWST: I guess that's about all we can do at this point.

Mr. Herbert: Exactly. Certainly companies are planning for it. I think to your question, they are looking at what does a 5% to 10% reduction mean, and how do we react in terms of programs, in terms of headcount, in terms of everything else. So you are hearing certainly that some companies are starting to think about what do we do if it happens and how do we implement this. But they are certainly looking very much to their customer, the DoD, for guidance, and unfortunately, the DoD is not able to say a lot more right now than what they have already said, which isn't a significant amount.

TWST: Because they don't know either.

Mr. Herbert: No. It's hard to model in this situation, and I think everybody is cautiously optimistic it doesn't happen, but this is the law as it stands right now. We are optimistic that even with a divided government after the election, President Obama and the Congress will be able to find a solution to avoid the full impact of the fiscal cliff.

TWST: But as you said earlier, it's a rationale for people to stay away from the space.

Mr. Herbert: Yes, it would be fair to say that a rational investor should be staying away from this space. However, I would make a few points. Defense companies like Lockheed Martin (LMT), Northrop Grumman (NOC) and Raytheon (RTN) have successfully deployed their relatively strong cash flows to increase share repurchases and dividends, which have made these attractive yields.

Second, most firms with defense exposure have aggressively started to reduce their cost structure, which has also helped earnings hold up. As a result of the cost cutting and returning cash to shareholders, many defense stocks have performed relatively well, especially considering the headline risk we have just been discussing.

And finally, there is significant growth in commercial aerospace markets, which for many companies is offsetting weakness in their defense markets. We are about two years into a four- to five-year production ramp in commercial transport aircraft markets, which has provided a nice tailwind for firms with exposure primarily to Boeing and Airbus (EAD.PA).

TWST: What is the longer-term outlook for defense?

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Rates

View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • Accomplish your career goals

    At Capella University, you can learn the skills you need to succeed. Why wait another day? Get started today.

    AdChoicesCapella UniversitySponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

    Bloomberg
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

    CNBC
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Norwich Information Security MS

    Online, accredited, top ranked. NSA Center of Academic Excellence. Recognized by the Department of Homeland Security. Download your free brochure!

    AdChoicesNorwich UniversitySponsored
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

    Reuters
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Don't buy Alibaba stock: 'Dean of Valuation'

    Investors should steer clear of Alibaba , valuation expert Aswath Damodaran said Wednesday. On CNBC's " Fast Money ," Damodaran, a professor of finance at New York University's Stern School of Business, noted that he was looking at Alibaba stock from the perspective of a long-term investor, not a…

    CNBC
  • Master's Degree in Nursing

    CCNE accredited MS in nursing in as few as 18 months online. Learn more today!

    AdChoicesNorwich UniversitySponsored
  • Play

    Tues., Sept. 16: Watch Humana Stock

    Humana, Global X Social Media Index ETF and Majesco Entertainment are among stocks to watch. WSJ's Chris Dieterich discusses the details with Michael Casey. Photo: Humana

    WSJ Live