Unlock: B/E Aerospace (BEAV) Bullish Fundamental View Pays Off

It pays to do fundamental research. This bullish note on BEAV was presented to clients on August 18. Company is getting acquired today by Rockwell Colins (COL) for $6.4 billion plus assumption of debt. To learn more about our approach and how you can become a successful trader, sign up for 2 week trial and test drive live chat room with some of the best traders: SUBSCRIBE

B/E Aerospace (BEAV) – Keep an eye on this chart Jags! No option activity to see in it yet collected good talking points from fundamental view after last earnings report with improving sentiment and now technically sets up for breakout. Highlights from July 29:

– Q2 EPS $0.84 vs. $0.82 estimate, beat
– Q2 Revenues $753M vs. $713M estimate, big beat
– FY2016 EPS Guidance reiterated at $3.25, in line

Under the surface, better trends emerge –

– Book to Bill Ratio 1.0x for 2nd straight quarter, strong!
– OE/Aftermarket revenue shifting from 60/40 to 40/60
– Q2 Organic growth accelerated to +5% from +4% prior qtr
– FY2017 growth guidance +7% YoY vs. +5.7% previously

There were two main key factors why think stock could perform better from here that you won’t get by simply reading the headline number.

1) Management has began a shift from low margin OEM business to high margin Aftermarket business. Currently revenue mix is 60/40 split and in coming quarters expect this to shift the other way, i.e 40/60. This would happen gradually and should allow operating margins to expand from 18.1% to 22%+ (not in consensus view)

2) Commercial Aircraft Segment revenues grew by +13.3% YoY to $611 million, well above $567M consensus view. Meanwhile, Business Jet Segment declined by -11.8% to $142 million vs. $147M estimate. In other words, the strong segment got stronger and the weak segment improved slightly. About Business Jets management commented that they see a recovery in FY2017 with supply / demand of business jets getting more aligned. Long term view not in consensus estimates.