A Wall Street Transcript Interview with Michael F. Ciarmoli, a Vice President and Equity Research Analyst with KeyBanc Capital Markets Inc.: Commercial Aerospace Continues to Outperform Among Industrials

Wall Street Transcript

67 WALL STREET, New York - May 28, 2014 - 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: Capital Equipment Technology Investing - Growth Opportunities in Data Security - Professional Security Equipment - Emerging Markets Penetration - Heightened M&A Activity - Future Growth and Market Share Gains - Increased Commercial Aircraft Production Rate - Aircraft Manufacturing Supply Chain

Companies include: Boeing Co. (BA), Alliant Techsystems Inc. (ATK), Orbital Sciences Corp. (ORB), Lockheed Martin Corporation (LMT), General Dynamics Corp. (GD), Mercury Computer Systems, Inc. (MRCY), Kratos Defense & Security Solu (KTOS), BE Aerospace Inc. (BEAV), TransDigm Group Incorporated (TDG), Precision Castparts Corp. (PCP), Curtiss-Wright Corp. (CW), Triumph Group Inc. (TGI) and many others.

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

TWST: Let's start with a refresher on your coverage universe.

Mr. Ciarmoli: At KeyBanc, we tend to focus on the small/midcap universe. Within the aerospace and defense coverage, we're probably split at this point two-thirds commercial aerospace, one-third defense. Part of that has been by design, given some of the headwinds around the defense industry amid the DoD budgeting environment. When we look at our coverage, it tends to range from market caps as small as $400 million up to some of the larger ones in the $30 billion range, but I would say the sweet spot for our coverage is in the $1 billion to $5 billion market cap, and again, skewed a little bit more toward commercial aerospace at this point.

TWST: When we spoke a year ago, you were very bullish on the commercial aerospace group. What are your thoughts and sentiment currently?

Mr. Ciarmoli: I would say we are still definitely positive, optimistic and bullish on that group. The commercial aerospace sector continues to outperform relative to the broader industrials, and it's really been the late-cycle sector that just keeps on delivering. We've seen a lot of clients look to some of the other industrial sectors, trying to potentially play a broader global recovery from a macro perspective in order to outperform, but that hasn't quite worked out. So the commercial aerospace stocks have really continued to deliver the results.

It's been a combination of the rate increases, newer aircraft in production, new aircraft introductions from Boeing (BA) and Airbus (AIR.PA). We've seen some of these companies continue to generate solid top- and bottom-line organic revenue growth, and that's been a missing ingredient in the broader industrial universe. So at this point we're inclined to stick with the commercial aerospace.

I think there is a little bit of risk in the sense investors are trying to pinpoint when this global economy will recover, and that does introduce rotation risk for the group. We contemplated that at the beginning of the year; so far it hasn't really played out, but we're still mindful of that, we're still looking at some of the higher-quality companies in the universe with a mindset that maybe the rising tide will not lift the entire group this year.

The one thing that has started to happen recently is some pickup in M&A; deal flow has been pretty active in commercial aerospace for several years now, and it still is a seller's market. The multiples have been very attractive, and I think that's keeping some of the asset valuations pretty high as well.

TWST: I was going to ask about that, because a year ago it was a similarly active M&A environment. Is there anything you would add on this topic?

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.

View Comments (0)