Initiate at Hold: Cyclical Upswing Dampened By Muted Margin Headroom.

研报英文原文证据摘录

Initiate at Hold: Cyclical Upswing Dampened By Muted Margin Headroom.

potential (from margins at RTX; from M&A at TDG). HONA

begins regular-way trading on 6/29 and does not yet have broad set of consensus

estimates, which makes it challenging to assess expectations. We initiate at Hold,

with a $250 PT, approx. 17.0x C27E EV/EBITDA, given the firm’s subdued op. profit

growth (limited margin headroom) compared to our preferred large cap aero stocks

(RTX, TDG, HWM, ATI, CRS).

All HONA Markets In A Cyclical Upturn; Mix Restrains Margin Lift

In our view, HONA’s three market channels are in an extended cyclical upturn, that

augurs an approx. 7% sales CAGR through C30, albeit with some mix pressures that

will dampen incremental margins vs. HONA’s recent history under the Honeywell

conglomerate. We expect HONA’s margin expansion to be fairly muted in C26-27,

given HONA’s relatively high margin “starting point” and as sales grow faster in the

low margin commercial aero OE market (15% of total sales; near 10% CAGR) vs. the

highly profitable commercial aero aftermarket (44% of HONA C25 sales; CAGR should

be 7-9%) & slightly less profitable Defense & Space (41% of total sales; 6-7% CAGR)

areas. Moreover, HONA is raising its engagement with and investment in its supply

chain (3,000 suppliers). HONA hasn’t quantified (to investors) the cost of its supply

chain investment, but we suspect it is non-trivial, given the cost of doing so by related

firms (e.g. GE Aero), and HONA’s persistently high levels of “past dues” (over $2B for

several years) that has led to some reputational damage. E.g. GD’s CEO publicly

named HONA as a bottleneck on a prior earnings call (Q1:23). To be fair, we believe

HONA is trying to address its supply chain challenges. HONA notes it has invested