At the same time that General Electric Company (GE) is exiting the financial services business, William Blair & Co. Analyst Nick Heymann says the company is accelerating its expansion into GE Software’s drive to expand data analytics.
“This is really trying to leverage what GE calls the Industrial Internet and their ability to now track real-time data not only for GE’s $1 trillion installed base of industrial products, but for virtually everybody else’s, since their Predix software is now embedded into all of the leading communication companies’ software such as Vodafone (NASDAQ:VOD), Softbank (TYO:9984), AT&T (NYSE:T) and Verizon (NYSE:VZ),” Heymann says.
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GE is going back to its customers and specifically explaining that they can benefit from the performance data from their installed base equipment, Heymann says. He says that the company is also providing recommendations to customers on how to improve profitability by efficiently managing and operating their installed base equipment.
“It looks to be on track to perhaps be a $4 billion business in 2017, and maybe as much as a $15 billion business in revenues by early next decade,” Heymann says. “And these are revenues that are very profitable, in the neighborhood of a 50% EBIT margin, because of their immense impact on improving the customers’ total profitability rather than just profitability related to their installed base of GE’s equipment.”
One of the aerospace & defense stocks that KeyBanc Capital Markets Analyst Michael Ciarmoli favors is B/E Aerospace Inc (BEAV). He has an “overweight” rating and a $68 price target on the company, which is a cabin interior provider and manufacturer of seats, lighting and kitchen galley equipment.
“We think they’re uniquely positioned to benefit not only from new OE production, but the trend that newer planes are larger and denser, with more seats and more passenger amenities than legacy aircraft,” Ciarmoli says.
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Airlines are continuing to make money and are, in turn, upgrading their fleets. Ciarmoli says B/E Aerospace is likely to benefit from what should be a healthy aftermarket retrofit cycle.
“What you’re seeing most of these carriers try to do is upgauge their fleet and commonize their fleet, so if they’re taking deliveries of new 737s, they want to make their old 737s look and feel the same in terms of the passenger experience,” Ciarmoli says. “B/E has got very good margins, very good market share position and a pretty good toehold on the newer platforms that are still in growth mode like the 787 and the A350.”
KLX Inc (KLXI), the spinoff of B/E Aerospace Inc (BEAV), has been out of favor with investors, according to KeyBanc Capital Markets Analyst Michael Ciarmoli. He says the company has 25% energy exposure and 75% exposure to aerospace, and is a distributor of aerospace consumables.
“It seems that all investors have wanted to focus on was the 25% energy portion of their business, where they provide energy services to the U.S. market, specifically to the shale play,” Ciarmoli says. “The company was spun out around $50 a share, sold off to around $36 a share.”
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Ciarmoli says investors have been getting caught up too much in the energy side of KLX’s business. However, he says the company is the “800-pound gorilla” in terms of servicing the airlines with aftermarket capabilities.
“We think the aerospace assets alone could be valued at $50, which means an investor would effectively be getting the energy business for free,” Ciarmoli says. “With the stock trading in the low $40s right now, we think that’s a pretty compelling play.”
Nick Stanage, CEO of Hexcel Corporation (HXL), says the company spent $48 million on R&D last year and plans to spend $50 million this year. He says management’s focus is on continued growth and innovation.
“Our R&D spend is divided among working on improving the properties of our products for the next aircraft, qualifying existing products for new aircraft about to enter service, and general material science to identify and develop the next new materials and system solutions that help our customers win in the marketplace,” Stanage says.
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Stanage says Hexcel’s advancement of its carbon-fiber and prepreg technologies have been significant for customers. He says the company has not only advanced the properties of intermediate modulus carbon fiber, but also improved its fiber’s interaction with its prepreg system to enhance performance.
“This improved combination helped us to win the role as the sole supplier of carbon-fiber prepreg for the primary structure, which includes the wings and fuselage, of the Airbus A350 XWB program,” Stanage says.
KeyBanc Capital Markets Analyst Michael Ciarmoli says one of his top stock picks is TransDigm Group Incorporated (TDG). He has an “overweight” rating on the stock and a $260 price target.
“It is probably one of the commercial aerospace aftermarket bellwethers, very unique private equity-driven model with disproportionately large EBITDA exposure to the aftermarket,” Ciarmoli says. “We think this name is sitting in the sweet spot of a still-attractive end market, which is the commercial aerospace aftermarket.”
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TransDigm is one of the best “allocators of capital” in the sector, Ciarmoli says. The company has recently deployed $1.3 billion to make three acquisitions, which Ciarmoli believes sets the stage for an incremental $1.75 of earnings next year.
“It’s a name that always trades at a premium, but given management’s track record, their ability to create value from acquired entities and proven operating model, we have confidence that estimates will continue to move higher, which is why this stock is one of our top picks right now,” Ciarmoli says.
Senior Vice President Paul Attwood of Huntington Asset Advisors believes Vipshop Holdings Ltd – ADR (VIPS), an online retailer providing products to customers in China, is taking advantage of China’s move toward a consumer-driven economy.
“The company is engaged in online product sales and distribution, which include numerous products like accessories, cosmetics and home goods. This is an example of an investment that takes advantage of what’s happening in the Chinese economy, namely the move toward a more consumer-driven and less industrial-driven economy. That’s a big long-term positive in our view,” Attwood says.
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Attwood says the shift can be seen in Vipshop’s sales and earnings growth, as the top line grew by 86% in 2014, with earnings increasing by 74%.
“Earnings estimates for 2015 are rising as the company improves average selling prices and increases its subscriber base. The company has a relatively high price to earnings multiple; however, when compared to the phenomenal growth rates we expect, the stock is very attractive,” Attwood says.
FBR Capital Markets Analyst Christopher Rolland says Fairchild Semiconductor Intl Inc (FCS) has underperformed its peers in recent years. But, he believes the company has finally gotten itself on firmer footing.
“They are shutting down three old fabs in the United States, and they are consolidating that footprint into South Korea, which is their state-of-the-art fab. And that will allow them to pretty substantially increase gross margin over time,” Rolland says. “So there is a self-help story going on there in that name, and then they are seeing some of their end markets start to pick up as well.”
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Rolland says Fairchild is also seeing an uptick in the auto, industrial and mobile segments. Specifically, he sees opportunity for Fairchild in adaptive charging for mobile phones.
“Adaptive charging allows users to get very, very fast charge times to their cell phones, something like four hours of talk time on a 10-minute battery charge,” he says. “And so their intelligent charging products have just started to take hold at some major OEMs. We think those things together make Fairchild pretty well-positioned right now.”
FBR Capital Markets Analyst Christopher Rolland recently issued a “buy” rating for Xilinx, Inc. (XLNX). He says Xilinx, along with Altera, has a duopoly on the programmable logic device — PLD — market.
“They both have had a pretty rough go of it recently,” Rolland says. “It’s finally getting to the point where comps are actually beatable and those guys can begin to show growth again.”
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Rolland says the markets that are beginning to heat up for Xilinx include industrial, auto and some of their more traditional markets like broadcast and test and measurement. Eventually, he believes the company will see a pickup in aerospace and defense, and possibly communications, which he says has been a particularly challenging market for semiconductors in recent years.
“But overall we think the PLD companies have good economy of scale, and we like the fact that they have this duopoly,” Rolland says. “We also think they have good growth and are poised for higher growth this year.”
Andrew Uerkwitz, Executive Director and Senior Analyst covering emerging services and technology companies at Oppenheimer & Co., says he thinks the market for GoPro Inc (GPRO) is likely to remain fairly limited. He says it is currently limited to people who use action cameras for sports, which is a relatively small market.
“For GoPro to really be successful, they have to bridge that gap from being an exclusively action camera to one you use everyday,” Uerkwitz says. “They have to go from where people are taking their GoPro from the ski slope to where they all of a sudden are carrying it with them all the time. And I just think the interface is so much easier on the smartphone than with a camera that GoPro is going to struggle to bridge that gap.”
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Uerkwitz says the numbers support his thesis. He says cameras peaked in 2010, with over 120 million units, and are projected to be 35 million units in 2015.
“Clearly — and the big thing that happened in 2010 is the iPhone 3 launch with an 8-megapixel camera,” Uerkwitz says. “For the first time you really could take a comparable picture with your phone, and you didn’t need to bring a second device.”
Oppenheimer & Co. Analyst Andrew Uerkwitz says Apple Inc. (AAPL) has made China a major focus in recent years. He says the company opened its last couple of major events with a video in China, and it continues to make large announcements in China.
“They are opening more stores in China than anywhere else over the next three or four years,” Uerkwitz says. “So I think Apple definitely sees China as the primary market outside the U.S.”
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Uerkwitz says Apple understands that the Chinese market is different than the U.S. market, and is handling it accordingly.
“I think if you ask Chinese consumers what they think about Apple, they very much think it is a Chinese-centric brand even though it really isn’t, “Uerkwitz says. “I think other companies that don’t put that same effort into China while treating it as its own market will ultimately lose.”
