EFTA00775616.pdf

4tUBS Global Equity Research Americas UBS Investment Research Aerospace UBS Business Jet Update Sector Comment Used Inventories Hold, Pricing Falls Further 10 June 2009 • Available inventories look to be stabilizing wew.ubs.cornfinvestrrentresearch Available business jet inventories look to finally be stabilizing, albeit at record high levels both in absolute terms and at 18% of the installed base. While still 55% David E. Strauss above prior year levels, available business jet inventories were roughly unchanged Ma st sequentially in May including a I% decline in young available aircraft listings (less than 10 years in age). New delivery position inventories have declined sequentially •7.212-7136181 in each of the past two months. Cristina Fernandez Ma)11 • Excess supply to pressure backlogs, force further production cuts We estimate average asking prices for most young aircraft models have now fallen +1-212-713 3321 30-40% from peak levels, with pricing down another 3-4% in the past month. Darryl Genovesi While our survey of industry professionals suggests some incremental interest at Associate Analyst these levels, we think record high used available inventories will continue to overhang orders, pressure existing backlogs and force further production cuts. •1-212-713-4016 • Expect weak orders & backlog risk to pressure valuations Overall, we think the current business jet market is characterized by significant oversupply, weak pricing and tight financing. While our key indicators and contacts indicate a bottom is near, we think the potential for further production cuts along with the risk of an extended downturn limits upside for most of the stocks. We think TXT can trade higher on an improved liquidity profile post its recent capital raise and is our preferred bizjet play over GD. Chart 1: Total Available and Young (less than 10 years In age) Aircraft Listings 18% 16% 14% 12% 10% 8 I. 8% 3 .0 6% ae 4% ae 2% 0% ESMESiMM$$'§') 03 003 0030 COM °CO COM °CO COM Oftl °CO N 2Z2Z2Z2Z2Z2Z2Z2Z2Z2Z2Z2Z2Z2 0-10 Years 10+ Years —% of Fleet Available for Sale Source: JETNET and UBS essmans This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 10. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at wirw.ubs.00m/independentresearch or may call +1877-208.5700 to request a copy of this research. EFTA00775616 UBS BusinessJet Update 10 June 2009 Used Business Jet indicators We believe the used business jet market serves as a leading indicator of the new business jet market. We closely monitor several key indicators of activity in the secondary market, including: I) inventory of available for sale aircraft including new delivery positions listed for sale, 2) age distribution of available aircraft and 3) pricing of available for sale aircraft. We estimate 3,057 business jet aircraft available for sale at the end of May (including 2,878 used aircraft and 179 new delivery positions), roughly in line with the prior month, although still 55% higher from the prior year. While total inventory levels remain at all time record highs both in absolute terms and at 18% of the in-service fleet, we think the slower growth rate over the past few months indicates that inventories are beginning to stabilize. Chart 2: Sequential Change in Used Aircraft Listings 10% - 8% - 6% - 4% - 2% - 0% -2% - Tair a ,1 1 III tl j Din, -4% - 9 • ti?- 0 0 •• 1°L Source: UBS estimates Young available aircraft inventories (less than 10 years in age), which had driven the recent inventory build, have also shown much lower sequential growth rates over the past few months and in May actually declined by 1%. Chart 3: Sequential Change in New and Almost New (0-5 Years) Aircraft Listings 30% 25% 209E 15% 10% 5% 0% -5% -10% 15% -20% a) O b 0 9 0 4 4 < 2 s Source: UBS estimates New delivery position inventories have declined sequentially in each of the past two months. UBS 2 EFTA00775617 UBS Business Jet Update 10 June 2009 We estimate average asking prices for most young aircraft models have now fallen 30-40% from peak levels, with pricing down another 34% in the past month. While our survey of industry professionals suggests some incremental interest at these levels, we think record high used available inventories will continue to overhang orders, pressure existing backlogs and force further production cuts. Overall, we think the current business jet market is characterized by significant oversupply, weak pricing and tight financing. While our key indicators and contacts indicate a bottom is near, we think the potential for further production cuts along with the risk of an extended downturn limits upside for most of the stocks. We think TXT can trade higher on an improved liquidity profile post its recent capital raise and is ow preferred bizjet play over GD. Chart 4: GD and TXT Forward PIE Multiples 30x 25x 20x a o. 15x o. 10x I Sx Ox t —TXT Note: Forward FE using rolling 12-mcnth (actual) EPS through May 2009 and UBS esbmales for future periods. TXT PE multiple for the current period Sects our 2010 imamate. Source: UBS eslimales UBS 3 EFTA00775618 UBS Business Jet Update 10 June 2009 Available Inventory Levels We estimate 3,057 business jet aircraft available for sale at the end of May (including 2,878 used aircraft and 179 new delivery positions), roughly in line with the prior month, although still 55% higher from the prior year. While total inventory levels remain at all time record highs both in absolute terms and at 18% of the in-service fleet, we think the slower growth rate over the past few months indicates that inventories are beginning to stabilize. Of the five major manufacturers, Bombardier had the highest percentage of its respective fleet available for sale at 19%, followed by Cessna at 18%, and Dassault, Gulfstream and Hawker Beechcraft all at 16%. Chart 5: Business Jets Available for Sale and as a Percentage of the Installed Base Available inventory levels are 3.600 18% stabilizing at record high levels 3.200 16% 2.800 I 14% it 2.400 12% i ZOCO tott 3 1,600 wit i I IIII! II II 59d c s 120o I III a 800 400 0 E'bE•b&- bE•bE•bE•bE•bE•bE•b&- b&-bE•bE•bE- 72=2=2=2=2=2=2=2=2=2=2=2=2=2 Source: JETNET and UBS estimates Chart 6: Absolute YoY Growth In Available For Sale Aircraft Listings 75% 50% 259E Ott 110 25% st44444 4444 444444 4444 kg ir a 8' 8 m 8 m 8 4' 8 Ir 8 Ir 8 8' E 8' E art 4' z2z:2 zre- zre- zre- zre- zre- zre- zre- zre- z2z2 Source: JETNET and UBS estimates By age class, we estimate the 0.5 and 6.10 year classes now have 11% (612) and 16% (543) of their respective fleets available for sale as compared to 5-10% a year ago. Meanwhile, business jets 20.30 years old now have roughly 30% of their fleets available for sale, above the recent average of 20%. UES 4 EFTA00775619 UBS Business Jet Update 10 June 2009 Chart 7: Available Inventory by Age Class and as % of Fleet in Age Class 800 TOO • of Available Inventry 600 500 400 300 200 100 0 0-5 6-10 11-15 16-20 21-25 26-30 30+ Age Class(Yrs.) Used Available —% of Age Class Source: JETNET and UBS estimates Currently, 38% of jets available for sale are less than I0 years in age, well above the 20-25% average over the last several years. Chart 8: Available Inventory by Age Class (In years) 26-30 23% 6-10 18% 21-25 11-15 9% 16-20 12% 6% Source: JETNET and 1535 estrnales Chart 9: Young Aircraft Available for Sale (less than 10 years In age) 1200 40% 1.000 35% 30% 2 800 3 25% 2 600 20% T. 400 15% 0 10% et 200 5% 0 s4.ns 4-s&-s4-s&-s&-s&-s A- b4't A- b4- 2=2=2=2=2=2=2=2=2=2=2=2=2=2 0-5 Years 6-10 Years —% of Total Available Source: JETNET and UBS estimates We estimate the new/almost-new component of available aircraft inventories, including new delivery positions and used aircraft five years old or younger, declined by 3% in May to 612, roughly 2.5x prior-year levels. UBS 5 EFTA00775620 OBS Business Jet Update 10 June 2009 Of the 612 0.5 year old aircraft available for sale, 179 are new delivery positions, Table 1: New Aircraft Delivery Positions 3% lower from April at 184, but still 2.5x higher from a year ago (ex Eclipse). Listed for Sale at May 31 and April 30 Chart 10: Historical New Aircraft Delivery Positions Listed for Sale Model May-09 Apr-09 Damn Mustang 34 32 Phenom 100 28 27 240 0 Phenom 300 10 10 a 200 Challenger 300 10 9 160 • Challenger 935 9 11 j 120 • Citron CJ4 9 9 g 80 • Citaton CJ3 8 10 0 40- Gultstream G-550 8 9 0 eeea 8,9 l el Citaton XIS. 7 10 1 1 Global Express 5000 6 7 4 1:2 -4 8 4 -5) .R4AWA- V,1 Chalianger 850 6 5 &del Express MS 5 6 ■ Total Ex Edina. ■ &apse 500 Gulfstrearn G-450 5 5 Citation Sovereign 3 5 Source: JETNET and WS estimates Fakon 20001X 3 3 Fakon 900EX EASy 3 3 We estimate young aircraft inventories (less than 10 years in age) declined by Learjet EOXR 3 3 1% in May, following steady increases over the past two years. Lineage1000 3 3 Airbus A318 Elea 3 1 Chart 11: Young Aircraft (less than 10 years) Inventories as a % of Installed Base Boeing BBJ 2 2 Airbus A319CJ 2 1 1,400 7% Lear* 45XR 1 2 1,200 6% Adam A700 1 1 % of Instated Base 1.000 5% Boeng BBJ2 1 1 800 4% Boeng BBJ3 1 1 Cilium X 1 1 600 3% Diamond D-JET 1 1 400 2% Fakon 2000EX EASy 1 1 200 1 Fakon 7x 1 1 0 0 Hanker 9COXP Hondaiet HA-420 1 1 1 1 n 7;1 9 12I1111111rik' Sino Smaaringen 5J30-2 1 1 Premer a 1 - 0-10 Years — % of Installed Base Damn CJ2. - 1 Gulfstrearn G-150 - Source: JETNET and WS estimates Legacy 600 Total 179 184 Despite the sequential decline this month, young aircraft inventories are still Source: Jena! and U8S estimates roughly double prior year levels. Chart 12: Absolute YoY Growth In Young Aircraft (less than 10 years) Listed for Sale 150% 100% 50% 0% I -50% 2 6: ; ; ; ; ; ; 11111111311 Source: JETNET and DOS estimates U856 EFTA00775621 UBS Business Jet Update 10 June 2009 A Look at the Newer Models Of the 26 newer models that we track individually, 21 had at least 10% of their installed fleets available for sale at the end of May. Seven of these 26 models had higher inventory levels in May compared to the prior month, while eight were flat and II declined. All 26 models had higher levels of available inventory compared to the prior year. Table 2: Used Aircraft Listings and Average Asking Price for Newer Models Used Avaibtie as Ch Model Used Available (units) Avemo? aP l) ArcSI Model Manutecturer May-08 May-09 Apr-09am May-C8aCl lAsy-09 may-081sc max5 Charge Max Dale LongRange Falcon 900E% Dassault 11% 26 26 0% 10 160% S 24.5 3 34.5 -29% 5 357 -32% 0c1418 Global Express' ecenbarder 10% 33 31 6% 15 120% 35.6 348.9 -27% 5 489 -27% Jun-08 Gufsream G-V 1G-500 &adman 7% 13 12 8% 6 1179E 30.6 3 45.0 -32% 5 450 -32% Jul-08 Gufsream GIV Gdfs0ean 20% 42 40 5% 26 14.3 3 19.1 -25% 5 20.1 -29% Jan-08 Gufsream G.IVSP/ 0-400 Gdfstrem 13% 40 40 0% 17 135% 18.4 3 26.0 -29% 5 315 -41% Aug48 Gufsream 0-560 Gdfstrem 7% 19 19 0% 4 375% S 41.0 3 56.0 -27% 5 599 -32% Jan.07 Large Challenger 601 embattle( 13% 48 48 0% 19 153% S 16.2 3 20.4 -20% 5 223 -27% Jan-08 Falcon 2000 Dassault 13% 30 27 11% 12 150% S 16.4 3 18.7 -12% 5 216 -24% Feb-08 Falcon 2000EX Dassault 6% 11 12 -8% 3 267% 525.6 333.8 -24% 5 355 -28% Mar-09 Legacy 600 Embraer 13% 20 20 0% 2 900% 19.3 3 20.0 -4% 5 245 -21% Dec-07 Medium Large Challenger 300 embattle( 8% 22 22 0% 7 214% 18.1 3 24.8 -27% 5 248 -27% Aug48 Odeon X Cessna 10% 29 31 -6% 19 53% 10.9 3 13.3 -18% 5 188 -42% Mar-06 Felten 50EX Dassault 20% 20 21 -5% 6 233% S 10.0 3 15.6 -36% 5 180 -45% Au346 Gulsrearn G-200 CalfWean 15% 34 35 -3% 19 79% S 13.7 3 15.3 -10% 5 176 -22% Mar-08 Medium Gufsream G-1002 Cadman 19% 15 16 -6% 14 7% 5 5.9 3 7.0 -15% $ 11.0 -48% Mar-06 Hawker 800107 Meeker Peachtree 14% 65 65 0% 24 171% S 6.7 3 9.0 -25% $ 9.7 -31% Jan-08 Learjet 60 60XR embeder 23% 84 80 5% 39 115% S 5.9 3 7.6 -22% $ 7.7 -23% Jun-08 SePef Lint Chetah Excel/ XLS3 Cessna 11% 80 78 3% 37 116% S 6.0 3 8.5 -30% $ 9.5 -37% May-06 Learjet 45 45XR Bombard& 12% 47 50 -6% 24 96% S 5.4 3 72 -24% $ 7.8 -30% May-07 Light Seedie1400.44 Haeker Seechaaft 16% 56 58 -3% 41 37% S 2.1 3 32 -35% $ 3.5 -40% Jan.06 Citation CJ1 CJ1. Cessna 18% 53 56 -5% 14 56% S 3.2 3 3.B -17% $ 3.8 -17% May-08 Citation CJ2/ CJ2+ Cessna 15% 58 63 -8% 26 123% S 4.6 3 5.0 -9% $ 5.3 -14% Feb-08 Citatco Encore Cessna 11% 25 25 0% 16 56% S 5.9 3 7.1 -16% $ 7.4 -19% Sep-07 Learjet 40 140XR Banked& 10% 12 14 -14% 8 50% S 6.1 Na Na $ 8.6 -29% Jul-06 Prime& Hanker Beechcraft 13% 35 33 6% 26 35% S 3.7 3 4.5 -17% $ 4.7 -22% Jan.06 ChM, CJ3 Cessna 7% 23 26 -12% 11 109% S 7.1 3 7.4 -4% $ 8.0 -11% Jan-08 1. Global Express also includes Express 5000 and Express XRS 2. Gullskeam G-100 also ndudes Astra 1125SPX 3. Citation Excel also ndudes XLS / XIS«. 4. Eleadeet 400A does rot 'n ude Hawker 400XR which had 15 aircraft available for sale this month 5. This column represents the maomum average pica athieved since 2035 for each aircraft model. Note: Analysis exclJdes new arcrall delivery positions. Source: JETNET and UBS estimates UM? EFTA00775622 UBS Business Jet Update 10 June 2009 Pricing Trends in the Secondary Market Rather than look at average pricing for the entire population of available aircraft, which can be distorted by monthly changes in its composition, we monitor four models that we believe capture pricing trends in their respective categories. Super Light We estimate the average asking price for a Citation Excel declined roughly 4% sequentially in May, and is now off 37% from its recent peak, while available for sale inventory increased by three aircraft. Chart 13: Citation Excel Rolling Three-Month Average Asking Price $10 R3M Avg Asking Price (SM) — 0 40 $9 130 $6 ST 10 $6 0 $5 3 —Available Inventory R3M Average Asking Price (RHS) Source: JelNel and UBS eslimales Medium We estimate the average asking price for a Hawker 800XP declined roughly 3% sequentially in May, and is now off 31% from its recent peak, while available for sale inventory levels were unchanged from the prior month's all-time high. Chart 14: Hawker 800, Rolling Three-Month Average Asking Price 80 $11.0 TO $10.5 g 1 w $19.0 $9.5 i $9.0 4 s 30 $8.5 .12 ‘g $1' a 20 $8.0 10 $7.5 0 $7.0 'II IA II IA IA Ft 32 32 32 32 32 32 32 32 3 Avalatie Invenlay —R314 Average Asking Price (RHS) Source: Jegilel and UBS eslimales UBS 8 EFTA00775623 UBS Business Jet Update 10 June 2009 Medium Large We estimate the average asking price for a Citation X declined roughly 4% sequentially in May, and is now off 42% from its recent peak, while available for sale inventory declined by two aircraft from the prior month's all-time high. Chart 15: Citation X Rolling Three-Month Average Asking Price 35 R3M Avg Asking Price (3M) t 30 3 25 1 20 E 15 I 10 5 0 4 4 la; 43 43 4 4 4 4 4 4 4 4 4 4 8 a2a2k 4 4' 4 4' 4 4 4' 4 4' 4 k •Available Inventory — RUA Average Asking Price (RHS) Source: JetNet and UBS estimates Large We estimate the average asking price for a G-IVSP declined roughly 4% sequentially in May, and is now off 41% from its recent peak, while available for sale inventory levels were unchanged from the prior month's all-time high. Chart 16: Gulfstream G-IVSP Rolling Three-Month Average Asking Price R3M Avg Asking Price (SW $32 $30 $28 $26 $24 S22 S20 S18 4 4 4 4 4$ 4 4 4 4 4 4 4$ nnnnnnn B 2z:2=:2=2=:2=:2=:2=:2z:2 —Available Inventory — R3MAverege Asking Price (RHS) Source: Jethet and UBS estimates UBS 9 EFTA00775624 UBS Business Jet Update 10 June 2009 ■ Statement of Risk The business jet market is cyclical in nature, largely driven by the general economic environment. Business jet manufacturers' earnings and cash flow are dependent on end-user demand, availability of customer financing, program execution and inventory management. ■ Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS 10 EFTA00775625 UBS Business Jet Update 10..kno2OD9 Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit Ivww.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Rating Category Coverage' IB Services Buy Buy 51% 36% Neutral Hold/Neutral 37% 31% Sell Sell 12% 22% UBS Short-Term Rating Rating Category Coverage IB Services* Buy Buy less than 1% 43% Sell Sell less than 1% 36% 1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 31 March 2009. UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Ratintt Definition Buy: Stock price expected to rise within three months from the time the rating was assigned Buy because of a specific catalyst or event. Sell: Stock price expected to fall within three months from the time the rating was assigned Sell because of a specific catalyst or event. UBS11 EFTA00775626 UBS Business Jet Update 10 June2009 KEY DEFIWTIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of. the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-tern (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record. discount; Neutral: Neutral on factors such as structure, management. performance record, discount: Sell: Negative on factors such as structure, management. performance record. discount. Core Banding Exceptions (CBE): Exceptions to the standard +1-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. 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Company Disclosures Company Name Reuters 12-mo rating Short-term rating Mice Price date General Dynamics Corp..I GD.N Neutral N/A US$59.25 09Jun 2009 Textron Inc.2• 4• 5•"•"" 4" It "' TXT.N Neutral N/A US$11.95 09 Jun 2009 Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months. USS12 EFTA00775627 UBS Business Jet Update 10 June 2009 4. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided. 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity. 16. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Textron Inc. 22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month's end (or the prior month's end if this report is dated less than 10 working days after the most recent month's end). Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. General Dynamics Corp. (US$) Prce Target (US$) — SIOCk Ptt. (MI 120- 140- SO- E0- 40- 20- 0 1 1 I I I I I I I I I I I I I I I I I V 1 4 1 4 I V I V I 7 / 2 4 / 4 7 * S s SI E S G S :5 5 5 6 3 6 6 - 6 3 6 6 - 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 I SW 2 Btei News No Paring Source: UBS; as of 09 Jun 2009 UBS 13 EFTA00775628 UBS Business Jet Update 10 June 2009 Textron Inc. (US$) — Prce Toga (M) — S1alt Prke 111851 0.0 i i i i i i i i i i i i 18. .7tt-4 ,-. -i 18. 4 ,5 L 8 8 8 asa T 3 I a I 3 5 3 , . ettil Buy MSCa No Riling Source: UBS; as of 09 Jun 2009 Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of p