Sunday, January 10, 2010

Aerospace & Defence 2010 Outlook [citibank]

Aerospace & Defence
2010 Outlook

Selective —
With the “recovery trade” largely played out, we do not expect civil aero shares to outperform defence significantly in 2010. Our top picks remain weighted towards defence on account of more attractive valuations and continued uncertainty for civil aero deliveries.

Civil Aerospace — Passenger traffic is recovering, tentatively, but airline profitability remains distant. The outlook for the OE delivery cycle has improved, with consensus now reflecting a shallower delivery cycle than previously. While the airframers have done an admirable job of managing the backlog in 2009 and deliveries now look unlikely to fall until late 2010, considerable uncertainty still exists from 2011 onwards.

Top Pick: RR — Civil Aero share prices already reflect a good deal of optimism, having more than doubled since March 2009. We still prefer aftermarket- to OEexposed stocks. Rolls Royce remains our top pick.

Defence — We expect modest long-term growth in US base budgets & falling supplementals. Budget cuts look likely in the UK. Having underperformed in 2009, defence stocks have started to rerate towards mid-cycle valuations. We believe that there is more to come. Corporate action is likely to be important in 2010, with potential bid targets attracting a valuation premium and a buyback looking mathematically compelling for BAE. Growth defence stocks are likely to retain their premium.

Top Picks:
BAE, COB, FNC — Large-caps BAE and Finmeccanica on account of valuation. Mid-cap Cobham on account of superior growth prospects and quality.

FY09 Results Season — Starts 11 February (RR). We look for defence companies to reassure over medium-term growth prospects, given budget concerns, and for civil aero to indicate signs of recovery or increased visibility.


1 comment:

  1. "Budget cuts look likely in the UK. " - Budget cuts are gonna come in the US. I wonder if the full body scanner implmentation takes place how this will affect the sector. L-3 is not likely to benefit huge because these are like 2% of its sales.