Paris Air Show highlights

If you are in the Airbus suplly chain, the news out of the Paris Air Show will be very heartening, according to this summary from CIBC World Markets research department. And if you are a journalist (looking for your next PE story angle) or retail investor (looking for investing opportunities), the strength of the Paris show gives you some insight into why so many private equity firms are currently investing in the aerospace industry, both parts and maintenance; the cash flows have a high degree of confidence for the next several years:

Paris Air Show, Day 1 Take-Aways

Airbus Closes the ’07 Order Gap with Boeing in a Day

The ’07 Paris Air Show is confirmation that good times continue for the industry and supports our bullish stance on the sector. Airbus closed its ’07 order gap with BA in a day with 300+ orders. Risk remains but we believe the sector provides unmatched EPS growth and visibility.

During the first day of the show, we had the opportunity to host client meetings with the management teams of Rockwell-Collins (COL:NYSE), Northrup Grumman (NOC:NYSE) and Lockheed Martin (LMT:NYSE). Each of the meetings provided the opportunity to dig a little deeper into the topics of the day.

COL continues to capture share in the competitive avionics arena and we believe that trend will continue with potential for competitive wins on both the A350 as well as new competitive business jets (including ERJs) over the next 6 months.

LMT and NOC provided upbeat comments, with LMT focused on F-16/JSF opportunities and NOC on BAMS, UCAV and Tanker. Meanwhile, United Technologies (UTX:NYSE) held a set of analyst meetings focusing on the company’s aerospace business with particularly positive comments our of Sikorsky helicopter.

The first day of the 2007 Paris Air show picked up where the 2005 show left off as Airbus captured over 300 orders and commitments. While Boeing (BA:NYSE) booked just 6 incremental orders to backlog on Monday, we do see additional order activity through the week for both makers. Although risk remains in new program execution (A380, 787, A350 and 747-8) and supply chains remain tight in places (titanium, forgings, castings, fasteners), commercial aerospace continues to offer investors compelling visibility through at least 2010 and we believe attractive risk/reward (16.6X average P/E coupled with 20% EPS growth in 2007 and 2008).

Order Activity: Boeing announced orders for 6 777F from GECAS. (The company also formalized the Lion Air order for 40 737s that had already been included in backlog as unannounced). Meanwhile, Airbus had incremental orders of 310 from Emirates, Qatar, US Airways, GECAS, Jazera, Nouelair, S7, Air France and ALAFCO. The delta between the two isn’t all that surprising given Airbus tends to hold back announcements for the show and Boeing tends to announce and include orders in backlog as they roll. YTD implied orders including the show announcements are now 423 for Boeing and 511 for Airbus (vs. 417 to 201, respectively, as of the end of May).

In Paris today, United Technologies (UTX-SO) hosted presentations focused on the company’s three aerospace segments. In total, the company expects to announce over 30 agreements worth $4B during the show. Importantly, comments out of the Sikorsky presentation were positive and indicated 2Q was tracking very well and management hinted at upside to that segment’s guidance, which should alleviate investor concerns over the businesses’ recovery from missteps in 2006. P&W will have some “exciting” announcements on its Global Material Solutions (GMS) aftermarket program later this week, which helps further the case for the company’s growth in that part of the market.

The Geared Turbo-Fan engine should be ready for an OEM, if needed, in 2012/13 and while the GE/PW alliance engine for the A380 would have potential on the A350, GE has negotiations that they have to resolve before any offering on the engine alliance can go forward. Hamilton Sundstrand also reiterated confidence in hitting targets for full year.

Curtiss-Wright (CW-SO) announced content on the 747-8, which solidifies the company’s ship set of $200k/aircraft on the plane. BBD signed up to long-term strategic cooperative agreement with China. BBD will invest in ARJ12 while China will co-invest in BBD’s C-Series (if and when that aircraft is formally launched). Meanwhile, Boeing signed an MOU with the Dubai Aerospace enterprise for maintenance and financing further highlighting the trend of cross-border partnerships.”

MRM