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The Zacks Analyst Blog Highlights: Boeing, Embraer, Apple, Tenet Healthcare and Moody's

Zacks Equity Research

For Immediate Release
Chicago, IL – June 13, 2014 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Boeing Company (BA-Free Report), Embraer S.A. (ERJ-Free Report), Apple Inc. (AAPL-Free Report), Tenet Healthcare Corporation (THC-Free Report) and Moody’s Corporation (MCO-Free Report).
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Here are highlights from Thursday’s Analyst Blog:

Can Boeing Gain from Airbus’ Loss?

Gulf carrier Emirates Airline cancelled orders for 70 A-350 airplanes that would have handed over nearly $21.6 billion to Airbus. Earlier, Emirates had agreed to buy 50 A350-900s, the mid-sized version of the aircraft, and 20 A350-1000s, the largest version. Deliveries were scheduled for 2019.

In the duopolistic commercial airplane market, will the order cancellation be boon for The Boeing Company (BA-Free Report)?

Less Competitive Market

Boeing and Airbus dominate the commercial aerospace manufacturing market, with major airlines across the globe using airplanes manufactured by these giants to run their fleet. Canada’s Bombardier Inc. and Brazil’s Embraer S.A. (ERJ-Free Report) are also in the commercial race but their presence in the market is negligible compared to the other two.

A-350 Versus 777

The Airbus A-350 model was developed to compete with Boeing’s 777X. A-350 is a twin engine, wide body long range aircraft developed by Airbus. Airbus, has to date, received orders for 742 A-350s with first delivery scheduled for Dec 2014. An A-350 can carry 250 to 400 passengers depending on the variant.

The 777X from Boeing’s 777 family will be the primary competitor for the long range A-350 model. 777X is expected to be more fuel efficient than A-350 and carry 350 to 400 passengers. About 21% of the airplane’s structural components will be manufactured by Japanese companies. The 777X model was launched at the Dubai Air show last year and received 259 commitments from four airline operators.

Brand Loyalty at Work

Was the order cancellation primarily due to the “fleet requirement review" at Emirates Air or was it something else? Emirates Air had placed an order for 150 777X, Boeing's latest wide body plane, at the Dubai Air Show. The order also had an option for 50 additional airplanes with the total value reaching nearly $76 billion at present list prices.

Airline operators worldwide have staunch brand loyalty. They try to keep their fleet as simple and less divergent as possible. This allows the airlines to get better after sales service from the manufacturers and makes the maintenance of aircraft easier. In addition, we have seen bulk orders have historically grabbed hefty discounts from list prices.

So, there is a big probability of Boeing gaining from the Emirates cancellation of Airbus’ order. The fuel efficient long range 777X could be the best addition to the Emirates fleet.

Boeing exited first quarter 2014 with a backlog of 5,100 airplanes valued at $374 billion. In April and May, Boeing added orders for 169 more airplanes. The backlog at Airbus is also impressive at 5,514 airplanes at the end of May 2014. So, the bulging backlog suggests that airline operators wait patiently for long periods to get both the model and the brand of their choice.

The Bigger Picture

Given the volume of existing backlog and the ability to steadily win orders, does the loss of 70 airplanes really matter for Airbus? In effect no, but we are talking of billions of dollars here and who really wants to miss out on surefire opportunities?

Per a study from Boeing, there is a huge possibility in the commercial aerospace market. The company forecasts demand for 35,280 airplanes in the 2013-2032 frame, valued at a staggering $4.8 trillion.

Both Boeing and Airbus are investing heavily in research and development to bring out more fuel efficient aircraft to keep their dominance going in commercial airplane manufacturing. In their recent Investor Meet, the Boeing CEO had mentioned that their company would like to replicate Apple Inc.’s (AAPL-Free Report) success by developing small increments in future jets rather than making big leaps in technology. “We want to be more like Apple than the apocryphal every 25 years,” he said. What the CEO had in mind was precisely the new 777X – the upgraded version of the 777 – to make big jumps in technology with lesser risk involved.

With no big competitor in sight, and taking nothing away from other existing producers and the latest entrant Commercial Aircraft Corporation of China, Ltd (Comac), an initiative of the Chinese government, we believe Boeing and Airbus will continue to share their dominance in the commercial airline market.
Tenet Healthcare Issues Debt, Gets Moody’s Rating

Tenet Healthcare Corporation (THC-Free Report) has recently issued $500 million aggregate principal amount of senior notes that are scheduled to mature in 2019. These notes carry an interest rate of 5.00% and are an add-on to the company’s $600 million unsecured senior note issuance that was completed in Mar 2014. These 5-year notes will be issued at a premium of 101.50%.

Tenet Healthcare intends to use the proceeds from the debt issuance to repay the 9.25% senior notes of the company worth $474 million that are scheduled to expire in 2015. The remaining proceeds will be used to meet fees and expenses related to the latest debt issuance.

Concurrently, Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO-Free Report) affirmed the existing “B3” debt rating, Corporate Family Rating of “B1” and Probability of Default Rating of “B1-PD.” All these ratings carry a stable outlook.

The rating affirmation came on the back of the credit rating agency’s expectations that the above issuance will lead to a slight increase in Tenet Healthcare’s financial leverage. However, interest costs are expected to decrease. Moody’s also expects Tenet Healthcare to utilize the debt issuance for constructive purposes like acquisitions and capital deployment. Nevertheless, free cash flow is expected to be modest in the short run due to increased capital spending. As a result, Moody’s believes that Tenet Healthcare might find it difficult to repay debt meaningfully.

Our Take

The latest debt issuance of Tenet Healthcare will require it to pay interests worth $25 million annually. Thanks to the company’s solid operational performance, it generates enough funds to service the debt uninterruptedly. Additionally, the fact that the debt will be issued at a premium of 101.50% reflects the company’s strong fundamentals, impressive credit scores and goodwill of investors.

However, Tenet’s interest expense has been rising over the last two years. In 2012, it increased 9.9% from the previous year and in 2013, it rose 15% year over year. The first quarter of 2014 also witnessed a 76.7% increase in interest expense. The above issuance calls for a further increase in interest expenses, thereby pressuring margin expansion.

Tenet Healthcare is a highly leveraged company. Its debt-to-capital ratio has been deteriorating over the past two years. This metric deteriorated 7 percentage points to 0.82x in 2012, another 11 percentage points to 0.93x in 2013 and a further 1 percentage point to 0.94x at the end of first-quarter 2014. The above issuance is expected to impact this ratio further and thus hamper the company’s balance sheet strength.

Zacks Rank

Tenet Healthcare currently carries a Zacks Rank #3 (Hold).

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