Capital Goods Flashcards
BOEING CO (BA)
Commercial airplanes; defense, space & security & global services; enormous scale, duopoly w/Airbus. Order backlog and strong liquidity but execution missteps
2Q24 results were below expectations and down significantly yoy. Mgmt commentary noted that FY24 FCF use would be larger than previously forecast with 3Q24 expected to be another use of cash. Announced a new CEO who started 8/8/24. Potential IAM strike in mid-Sept. Increased deliveries important to lead to increased cash flow. Long term, BA continues to be well positioned with a full order book into the next decade. IG rating continues to be a priority but FY25 FCF and deliveries are focus of the rating agencies. On 7/1/24 ann the all stock acq of Spirit Aero with expected mid-2025 close. Possible fallen angel. Ratings triggers: all 3 agencies focused on FCF generation for which aircraft production deliveries is the key indicator. If no path to 38 737s and 5 787s/mo into FY25, downgrade likely
Baa3 (Neg)/BBB-(Neg)/BBB-
Aerospace/Defense - Americas
$51.75bn in index across 40 issues
HEICO CORP (HEI)
Jet engine and aircraft component non-OEM replacement part manufacturer (lower cost than OEM) and electroninc technologies. Geograpic diversification, committed to IG (low leverage, conservative financial policy, strong margins), but acquisitive
2Q24 earnings were inline with expectations. Expect FY24 growth in both Flight Support and Electronic Tech benefitting from solid demand and acquistions. Following the Wencor acquisition, HEI targeting PF net leverage at 2x near FYE24. Likely to continue to pursue acquisitions
Baa2/BBB
Aerospace/Defense - Americas
$1.20bn in index across 2 issues
HUNTINGTON INGALLS INDUSTRIES INC (HII)
US Navy shipbuilder, spun out of Northrop Grumman in 2011, strategically important. Faces margin pressure/competition, high leverage
HII is one of the largest nuclear and non-nuclear US shipbuilders. $48.5bn backlog as of 2Q24. 2Q24 results were better than consensus though 3Q24 guidance below consensus. Focused on maintaining IG credit rating. Reported leverage improved from 4.5x at YE21 to 2.5x at YE23 reflecting debt repayment of $880mn over the past 2 years. Further improvement in credit metrics likely limited as leverage target has been achieved and excess cash expected to be diverted to shareholder returns.
Baa3 (Pos)/BBB-/BBB
Aerospace/Defense - Americas
$1.70bn in index across 3 issues
L3HARRIS TECHNOLOGIES INC (LHX)
Leading A&D tech company with significant scale via Harris Corp/L3 Technologies merger (2019), focus on modernization, space. Strong backlog but debt-funded growth strategy and less scale than competitors
2Q24 results were mixed; 2024 guidance raised inline with consensus. Credit story largely driven by deleveraging following the 2023 acquisitions of ViaSat’s Tactical Data Links product line and AJRD resulting in uptick in net leverage to 3.7x (reported 3.2x at 2Q24, target <3.0x by YE24). Expect Negative outlooks at agencies to be resolved with delev progress. Curve is likely too flat 10s/30s only 6bp
Baa2 (Neg)/BBB(Neg)/BBB+(Neg)
Aerospace/Defense - Americas
$10.64bn in index across 15 issues
LOCKHEED MARTIN CORPORATION (LMT)
Largest defense contractor: aircraft, missiles, missile defense systems. High barriers to entry, strong backlog, diverse capabilities but unfunded pension obligations. Should keep leverage in line with mid-A ratings but aggressive financial policy (buybacks)
2Q24 earnings were above expectations. FY24 guidance was raised. M&A unlikely but fin policy aggressive (FY24e $4B div and $4B share repo). Guided FY24 FCF $6.0-6.3B. Mgmt doesn’t think fin policy should impact A rating. Fitch expects leverage to remain at high1x to 2x range
A2/A-/A
Aerospace/Defense - Americas
$19.59bn in index across 25 issues
NORTHROP GRUMMAN CORP (NOC)
Defense contractor: intelligence, surveillance, recon; space logistics; precision strike; unmanned aircraft. Key supplier to DoD and Lockheed but low labor productivity, shareholder friendly, tough margins
2Q24 reported earnings were ahead of expectations. FY24 guidance raissd. Well positioned in B21, GBSD and Space though programs are lower mrgn. NOC has noted that it expects FY24 FCF (guided $2.25-2.65B) below shareholders returns, share repo $2.0B+ and dividends $1.0B+
Baa1/BBB+/BBB+
Aerospace/Defense - Americas
$13.60bn in index across 14 issues
RTX CORP (RTX)
fka Raytheon, large and diversified. Produces aircraft engines, aerospace systems, radar, missile systems. Some geographic diversity outside of US (commercial), strong FCF, near-term focus on debt reduction. Cutting edge tech but aggressive financial policy
2Q24 results were better as commercial aero continues solid. Guidance for Rev and EPS raised and FCF lowered ($4.7B). Will continue to benefit from the recovery of commercial aero. Powder coat issue estimated $6-7B issue through FY25 ($3-3.5B to RTX). Share repurchase should remain moderate in FY24 following aggressive ASR in 4Q23; dividend ~$3.5B
Baa1 (Neg)/BBB+(Neg)
Aerospace/Defense - Americas
$36.12bn in index across 35 issues
BAE SYSTEMS FINANCE INC (BALN)
London defense contractor, significant supplier to US gov’t and others incl. Saudi and Australia. Large, long-term contracts, diversified (electronic systems, mil. Aircraft, submarines, surface ships, cyber). Potential for releveraging
1H24 results better than expected with revenue and op profit beat. Backlog £74.1bn at 1H24 (~3x FY23 revenue). Raised FY24 guidance. High shareholder returns with 50% of underlying earnings going towards dividends and surplus distributed to shareholders in the form of buybacks (current authorization £1.5bn). No formal leverage target but committed to IG rating.
Baa1/BBB+/BBB+
Aerospace/Defense - Europe
$10.30bn in index across 12 issues ($10.30bn 144a)
ROLLS-ROYCE PLC (ROLLS)
British multinational aerospace and defense company, known for designing, manufacturing, and distributing power systems for aviation, marine, and industrial applications. Long history of innovation and engineering excellence, a leader in the aerospace sector with a strong focus on high-performance engines. Advanced technology and significant investments in research and development give a competitive edge in the market. Strong brand reputation and technological advancements, but exposed to cyclical industries.
Moody’s u/g to Baa3 on 8/14/24; S&P u/g to BBB (p) on 8/21/24 follow 1H24 results a material beat: FCF of £1.2bn is 35% ahead of cons with EBIT £1.1bn is a 27% beat. 2024 guidance raised signif ahead of consensus: FCF of £2.1B-£2.2B and Op profit of £2.1-£2.3B. Reinstated dvd with a tgt 30% earnings payout. 1H24 net lev 0.3x (vs FYE23 0.8x), liquidity £6.8B. Would prefer to run at a net cash position.
Baa3(Pos)/BBB/BBB-
Aerospace/Defense - Europe
$2.00bn in index across 2 issues ($2.00bn 144a)
BUILDERS FIRSTSOURCE INC (BLDR)
Manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders and remodelers. They offer a wide range of products, including lumber, windows, and doors. The company’s strong cash flow generation and disciplined capital allocation strategy, including share repurchases and acquisitions, support its financial health. Their focus on value-added products and digital innovations also enhances their market position.
Largest US distributor; can provide ~50% of products to build a home; reiterates focus on investing in unproven digital platform which it feels will be transformative for the industry; 77% new residential; believes leverage will remain within targets (1x-2x net leverage); metrics also warrant higher ratings; overweight bonds
Ba2/BB-(Pos)
Building Materials - Americas
$3.55bn in index across 4 issues
MARTIN MARIETTA MATERIALS INC (MLM)
Natural resource-based building materials company supplies aggregates and heavy-side building materials to the construction industry in the US and internationally: crushed stone, sand, gravel products; concrete and asphalt; paving products and services
Business is primarily in aggregates (leading position in 90% of its markets; 67% of 2024E revenue); product line also includes cement & downstream (28%) and magnesia specialties (5%). Infrastructure spend, reshoring trends, energy investments, and data center build-outs supportive of continued pricing momentum. Focused on M&A and shareholder returns but committed to IG balance sheet with leverage 2.1x at 2Q24 (target 2.0-2.5x). Should trade in line with VMC; affirming Neutral.
Baa2/BBB+/BBB
Building Materials - Americas
$3.70bn in index across 6 issues
MASCO CORPORATION (MAS)
Designs, manufactures, and distributes home improvement and builiding products: plumbing (faucets, showerheads etc. under Delta, Brizo, Kraus, etc brands) and decorative architectural products (paints, primers, etc under Behr and other brands)
Business leveraged to Repair & Remodel with ~60% of revenue from Plumbing Products and the remainder from the Decorative Architectural segment. Management anticipates ongoing demand headwinds in 2H24 as market conditions remain challenged but confident in ability to drive op margin expansion given focus on execution and op efficiencies. Focused on IG rating with target leverage of <2.5x (reported 2.0x at 3Q24). Will balance buybacks with bolt-on M&A in core markets. UW on R&R fundamentals and RV.
Baa2/BBB/BBB
Building Materials - Americas
$2.50bn in index across 6 issues
MOHAWK CAPITAL FINANCE SA (MHK)
Largest mfg. of floor covering products, incl. carpet, ceramic, wood, laminate flooring. Good scale, diversification but acquisitive, cyclical, reliant on new homes
Ceramic 39% of LTM sales, flooring North America 34%, Floowing ROW 27%. Residential remodeling remains soft and although commerical is outperforming residential, it is slowing. Committed to IG rating with reported net leverage 1.3x at 2Q24 and long-term target of 2.0-2.5x. UW on industry fundamentals and RV.
Baa1/BBB+/BBB+
Building Materials - Americas
$1.10bn in index across 2 issues
OWENS CORNING (OC)
Manufacture and sale of insulation, roofing, and fiberglass composite materials: composites, insulation, and roofing
Segments include roofing (31% of 2023 revenue including DOOR), insulation (29%), doors (22%), and composites (18) with ~70% exposed to residential construction followed by 20% commercial and 10% industrial. Some weakness in ex-US businesses - US accounts for 75%, Europe 12%, APAC 5%, ROW 8%. Masonite (DOOR) acq completed May 2024 resulting in increase in leverage, FYE guide 2x; target 2-3x. Prefer OC over MAS given a more diversified business profile and the latter’s exposure to the R&R segment; affirming OW.
Baa1/BBB/BBB
Building Materials - Americas
$4.90bn in index across 10 issues
SMYRNA READY MIX CONCRETE LLC (SMYREA)
Provides ready-mix concrete and construction materials across multiple states. They focus on delivering high-quality products and services to their customers. The company’s recent financing transactions, including a significant term loan facility, indicate strong financial backing. Their expansion through acquisitions also supports their growth strategy.
Small private ready mix concrete business; strong organic growth; balanced between resi and non-resi but shifting towards infrastructure; geographically concentrated; competitive advantage with supplier contacts and network; acquisitive but keeps leverage within reasonable range; focused on reducing net leverage to 3.0-3.5x target; bonds quote too wide to peers
Ba3(Neg)/BB-
Building Materials - Americas
$2.20bn in index across 2 issues
STANLEY BLACK & DECKER INC (SWK)
Tools and outdoor products, 63% in US plus Europe, EM, Canada. Tools & Outdoor segment and industrial segment (engineered fastening and infrastructure business)
Tools & Outdoor segment accounts for ~85% of revenue – Power Tools (48% of segment revenue), Hand Tools (30%), Outdoor Power Equipment (22%) – and Industrial segment accounts for 15%. 60-65% of revenue generated in the U.S. Ongoing cost savings program on track to achieve $2bn pre-tax savings by end of 2025. Debt reduction remains top priority for 2024 and 2025 with IG rating commitment. Trades wide of similarly rated (index rating) MHK and lower rated MAS but warranted given persistent high leverage, ongoing restructuring, and impact of macro backdrop on business.
Baa3/A-(Neg)/BBB+
Building Materials - Americas
$4.65bn in index across 9 issues
ASHTEAD CAPITAL INC (AHTLN)
International equipment rental company under Sunbelt (second largest) brand in the US and A-Plant (largest) in the UK. It benefits from improved operational performance (margins), a strong fleet, and diverse end markets. On the downside, it has geographic concentration and cyclical end markets.
Slower US non-residential market and softening UK market conditions offset by strength in mega projects and infra spend as well as specialty business. Capital allocation skewed toward fleet expansion and bolt-on acquisitions (and returning excess cash to shareholders) constraining significant improvement in leverage; expect to operate within 1.5-2.0x net leverage target range (reported 1.7x at F1Q25). OW on RV.
Baa3(Pos)/BBB-/BBB
Construction Machinery - Americas
$6.20bn in index across 9 issues ($6.20bn 144a)
CATERPILLAR INC (CAT)
Caterpillar Inc. is a leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Operating strategy defined by restructuring initiatives.Strong global market position and diversified product portfolio.Consistent cash flow generation and robust balance sheet.Exposure to cyclical industries and commodity price volatility.
Leading position in the construction machinery sector. North America govtrelated infra projects remain healthy but seeing weakness in NA rental fleet loading as well as other geographies including APAC and Europe. Expecting to return substantially all ME&T FCF to shareholders over time. Stable credit with solid credit metrics and balance sheet but UW on RV.
A2/A/A+
Construction Machinery - Americas
$19.24bn in index across 26 issues
DEERE & CO (DE)
Leading manufacturer of agricultural, construction, and forestry machinery.Strong brand recognition, technological innovation and market leadership.Consistent profitability and solid cash flow.Exposure to agricultural commodity price fluctuations and cyclical demand.
Ag fundamentals muted near-term but remain favorable over the longer term. Construction and forestry demand has tempered alongside continued price competition - while U.S. govt infra spending and manufacturing investments remain supportive, seeing persistent weakness in CRE and multifamily. Disciplined financial policy with commitment to IG rating.
A1/A/A+
Construction Machinery - Americas
$32.28bn in index across 48 issues
