JPMorgan Downgrades B/E Aerospace, Emerging Risks Give Pause

JPMorgan has downgraded B/E Aerospace Inc

to Neutral from Overweight on the rising uncertainty around the growth outlook in 2017. "Management's focus on returning cash to shareholders, and strong execution relative to its top competitor, Zodiac, where BEAV has the ability to take share, are positives, but the weak bizjet end market, little visibility on spares, and the pushout of retrofit timing are likely to pressure growth," analyst Seth Seifman wrote in a note. Seifman, who removed the stock from Americas Focus List, sees risk to 2017 sales growth outlook of 7-8 percent and the analyst estimate 5 percent. The analyst noted that 25-30 percent of the company will make a minimal contribution to organic growth as retrofits have slipped to 2018 and weak growth from the bizjet/helicopter end market. In addition, Spares (20 percent of sales) growth in 2017 could take a hit and would be "lumpy," despite a growing installed base. "5% spares growth contributes 100 bps company-wide. This puts a lot of pressure on commercial OE, which is about half of sales. If commercial OE grows ~13%—roughly double what we anticipate for widebody deliveries, BEAV can reach its target but we view this as ambitious, even in the context of share gains and rising sales for 737 lavatories and A350 galleys," Seifman highlighted. BEAV has built up a $472 million excess over average cost balance, primarily related to A350 galleys and 737 lavatories. Though the company expects the balance to start growing at a slower rate, Seifman is concerned over the "persistent growth" of this balance and warning that it could result in downward margin revisions in the future. As such, the analyst cut his 2017 EPS estimate by 15 cents to $3.55, mainly for lower sales. The analyst, who also cut the price target to $50 from $54, kept his 2016 EPS estimate unchanged at $3.25. "Valuation is not stretched at 13x our 2017 EPS estimate but given the risk of downward revisions—we are now ~15 cents below consensus at $3.55—and the difficulty we see in getting a multiple on an aero stock with high widebody OE exposure, we believe upside is more limited," Seifman added. According to TipRanks, Seifman has a success rate of 75 percent with an average return per recommendation of +5.9 percent. The analyst is ranked 1,469 out of 3,929 analysts. Shares of B/E Aerospace closed Thursday's regular trading session at $46.80.