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Business jet sales are flat but have the potential to liftoff.
Sunday 14, May 2017

Weaker players are retreating from the market. Some players are reasonably valued. Business jet sales have to be very sluggish to recover from the financial crisis. The recovery has been very sluggish and this had to lead to the dominant perception that growth would be slow in the future as well. This however does not have to be the case. Jetcraft's future outlook. If companies are starting to invest again, the labor markets become more tight and the price of companies increases this might result in less strong cost control. There are several reasons why this might happen. Business jets might help to attract top management with its allure, Business jets. Picky on management expenses.Business jet sales sales well in times of optimism and increase with global GDP growth. While growth has been sluggish, GDP and wealth are still increasing. That is why I expect the ratio to GDP to hold in the future. Used aircraft inventory is clearly declining and the only reason that the value of money has been lost. This improving trend can be seen at the top of Textron's most important aircraft the Citation. The companies with the most revenue in the industry have been General Dynamics with their Gulfstream brand and Bombardier. Bombardier but it seems to be in financial trouble because of the development of their C-Series which would rival Boeing and Airbus is not going according to plan. If one is not looking at the proceeds of the sale, Textron with its Cessna and Beechcraft brands is selling 697 aircraft more than the amount of its closest competitor. It is important to look at the quality of the companies that make it up to the upswing in the cycle. This is particularly important for companies in the industry with lots of technological progress that requires constant investment in R & D. I have already mentioned that Bombardier is in trouble. Companies. General Dynamics is a strong company that has a long tradition of value creation and has strong profitability and positive cashflows. This means the company has the right to keep its strong position. Its valuation at an P / E of 20 and a normalized P / FCF of over 30 is however quite rich. I do not like their focus on buybacks at current prices and that only 27% of revenue is from aircraft. Textron is a strong company that is profitable with a P / E of only 14 (which is somewhat misleading given one offs) and an attractive P / FCF of 20. Their income and profit are relatively stable while profitable aftermarket sales have increased significantly. Its position in the business jet is the business of the Beechcraft. Aviation however only accounts for 36% of Textron's revenue with Bell helicopter. Textron appears to be willing to invest given its pipeline with the Citation Longitude, The Bell 505 Jet Ranger X and its Scorpion. The acquisition of Artic Cat, however, is also active outside the business jet space. Dassault Aviation is a French player which is more focused on military. Furthermore it has trouble with its order book for its commercial jets. Embraer is a Brazilian company that is struggling in part because of the bust in developing countries. While it is cash flow is negative and expected to be in this year. Embraer has lost a place to other companies. A positive however is that Embraer is primarily a business jet producer and more of a pure play on its recovery.

Business jet sales are cyclical and it could be that it might decline further before it gets better. Furthermore it could be that there will not come a rebound in business jets sales because companies and rich people continue to see them as a waste of money. New entrants like Honda are an additional risk while Boeing or Airbus might try to expand further into this adjacent market.  Textron and General Dynamics seem best positioned to take share of competitors and benefit from a rebound in the sale of business jets. Both seem reasonable investments especially when Military spending around the world would increase. Textron however makes a larger share of its revenues in business jets and has a lower valuation. While General Dynamics has a decent dividend and historically a strong operating culture. Given that Textron has the better valuation while investing in the future as well I would invest in Textron after additional due diligence into their other operations.

 

Wubbe Bos

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