EFTA02444120.pdf

SUBS Global Equity Research Amerces UBS Investment Research Aerospace UBS Business Jet Update Sector Comment Used Inventories Hold, Pricing Falls Further 10 June 2009 • Vs ailable inventories look to he stabilizing witubs cccruinvestmentresearch ailable business jet inventories look to finally be stabilizing, albeit at record high levels both in absolute terms and at IS% of the installed base. While still 55% David E. Strauss above prior year levels, available business jet inventories were roughly unchanged Aratyst sequentially in May including a 1% decline in young available aircraft listings (less than 10 years in age). New delivery position inventories have declined sequentially in each of the past two months. Cnstina Fernandez Aralg • Excess supply to pressure backlogs, force further production cuts We estimate average asking prices for most young aircraft models have now fallen 30-40% froni 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. • 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 38.00 18% 3200 16% 2000 14% % of Installed Base 2.400 12% Aa... 2000 10% 1.800 8% a 12131) 6% 800 4% 400 2% 0 0 *wm$$$$4-4-grilsam"484.3 1444.144/14ilkiimi4411414 0-10 Years 10. Yeats —%ot Fleet Avadatie to( Sale Source. JETNET and UBS °striates Thls report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 10. IJBS 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 vAwcubs.comiindependentresearch or may call +1 877-208-5700 to request a copy of this research. EFTA_R1_01520326 EFTA02444120 U93 Business Jet Weil 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% lel f ) -2% • 'lir' I -fig Sane: IRS 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% • 20% 15% - 10% - 5% - 0% -5% - -10% - -15% • 20%- I $ a Son: UBS estimates New delivery position inventories have declined sequentially in each of the past two months. UBS 2 EFTA_R1_01520327 EFTA02444121 WM Business Jet tides 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 3-4% 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 our preferred bizjet play over GD. Chart 4: GD and TXT Forward PIE Multiples 30x 25x • 20x •d 15x. '2 , i/ Y 4•1-3 4/W`'•• .014 /% lox• t \ \ LL 5x - Ox ct, gga 6 (O Ia.; 4 4 I 'ic c 4 4 4 4 Go Txr Note: Reward PE using riling 12-month Masai) EPS through May 2009 and 1)85 estimates ice future mends. Tr PE multiple la the current period reflects our 2010 estimate. Source: LIEIS estimates jE,S 3 EFTA_R1_01520328 EFTA02444122 U93 Business Jet *bit 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% 2,803 14% <.? 2.403 12% z7,3 a. 2.003 10% % 1,203 6% -6 803 4% 400 2% 0 0% PPP 67' 27, '33 53 4 '4 '4"4' fl ", `4 11414144.U444414..41..414144444 Sass: JETNET end UBS 'situates Chart 6: Absolute YoY Growth In Available For Sale Aircraft Listings 75% 25% 1 0% lfjl riquiv1/4.4immpinfirIfir -25% ;13 L33 a '“ fit tic". 4 rei niti14444144141414:141-111 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%. J654 EFTA_R1_01520329 EFTA02444123 UN Business Jett/plait 10 June 2009 Chad 7: Available Inventory by Age Class and as % of Fleet in Age Class 800 40% 700 600 30% 500 400 20% 44 300 200 10% e 100 0 0% 0-6 6-10 11-15 16-20 21-25 26-30 30+ Age Class (Yrs.) aaaal Used Avadable of Ago Class Source. JETNET and MS estimates Currently, 38% ofjets available for sale arc less than 10 years in age, well above the 20-25% average over the last several years. Chart 8: Available Inventory by Age Class (in years) 30r 045 12%* 26-30 23% 6-10 18% 21-251 11-15 9% 16-20 12% 6% Source: JETNET and U8S estirnates Chart 9: Young Aircraft Available for Sale (less than 10 years in age) 1200 i r 40% 35% 1,000 30% i 800 5% 15% (2 E 400 220% 15 10% 200 0-5 Years 6-10 Years of Total Available Source: JETNET and UMestimates 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. J655 EFTA_R1_01520330 EFTA02444124 UN Babas JM Updeta 10 June 2009 Of the 612 0-5 year old aircraft available for sale, 179 arc 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 C4abonklustang 34 32 Pherom 100 28 27 240 Edpre wideion a 7 Pherom 300 10 ID as 2® Challenger 300 10 9 160 Challenger 605 9 It 120 - Olsten CJ4 9 9 t 8° - O939011 C.13 8 ID G6Ifslream G550 8 9 40 Craton XIS+ 7 ID 0 n e n p ,1 )II ,yi pp p Global Express 5000 6 7 r f. 244 a 4 -i g fAa4A34 4 a 3 Challenger 850 6 8 Global Express MS 5 6 • Toul Ex Wyse Ecepse 500 Gulfstream 6-450 5 S Sane:!MET and LEISestimates Citainn Sorcriegn 3 5 Falcon 2000LX 3 3 Falcon 900EX EASY 3 3 We estimate young aircraft inventories (less than 10 years in age) declined by Leonel 60XR 3 3 1% in May. following steady increases over the past two years. Lineage 1000 3 3 Aibus A318 Me 3 1 Chart 11: Young Aircraft (less than 10 years) Inventories as a % of Installed Base Boone Blikl 2 2 Altus A319O.1 2 1 1400 Leanei 45XR 1 2 1.200 Adam A700 I 1 1.000 Boeing BBJ2 I 1 800 Bourg BBJ3 1 1 3 Dilation X 1 1 600 Diamond D-JET I 1 400 Falcon 2000EXEASy 1 1 200 Falcon 7x 1 1 0 HarAcer9O3XP 1 1 3nReci; 6.-,?:?)* 8;?$*-- "'"" -'44 1^ FlondeJet HA-420 1 1 r.4. 1" e43 Sno Swearingen SJ30-2 I 1 3232332232 -1q313/313343 - 42 s 314 Pruner II I - 0-10 Years —% of Ins%Iled Base 1 Citabon CJ2* • Gullstearn G-150 • • Source: JETNET and UBS tamales Legacy 600 In 119 184 Despite the sequential decline this month, young aircraft inventories are still Source: JetNel and UBS estmates roughly double prior year levels. Chart 12: Absolute YoY Growth in Young Aircraft (less than 10 years) Listed for Sale 150% 100% 50% ET 0% 'IIhIIl ,,J le lila') I -11" e -50% ifili11111111111111111M Son JETNET and LSS estimates JBS6 EFTA_R1_01520331 EFTA02444125 UN Business Jel 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 Matta* as %o1 Model Used Available (tints) Average Pia ?abaft Yodel Manufacturer May-09 May-09 Apr-09 Change May-08 Change May-09 May-08 Change Ma? Change Max Dale Long Range Faccn 900E% Dassault 11% 26 26 0% 10 160% $ 24.5 $ 34.5 -29% S 35.7 -32% Oct-08 Gabe! Extwesel Bornteme, 10% 33 11 6% 15 120% 5 35.6 $ 469 47% S 489 -27% Am45 GuYsream G-V i G-500 GuYstream 7% 11 12 8% 6 117% $ 30.6 $ 45.0 -32% 3 45.0 42% Jul-08 Gursream GA( GOstream 20% 42 40 5% 26 62% $ 14.3 $ 191 -25% S 20.1 -29% Jan-08 Gueskeam G-IVSPi G-400 Guestrearn 13% 40 40 0% 17 135% 5 18.4 $ 28.0 49% 5 31.5 41% Aug-08 Guasiream G-550 ~am 7% 19 19 0% 4 375% 5 41.0 $ 58.0 -27% $ 599 42% Jrm-07 Lwal, Chalenger 604 Bombards 13% 48 48 0% 19 153% 5 16.2 $ 20.4 -20% 5 223 47% Jan-08 F8[1=11(00 Dassault 13% 30 27 11% 12 150% $ 18.4 $ 1(7 -12% $ 21.8 -24% Feb-09 Fatten 2000E% Dassault 6% 11 12 -8% 3 267% $ 25.6 $ 33.8 -24% $ 353 -28% Mar-09 Legacy 600 Fmbraer 13% 20 20 0% 2 900% S 1(3 $ 20.0 4% $ 243 -21% Dec-07 Medium Large Chateriger 303 Bombardier 8% 22 22 0% 7 214% $ 18.1 $ 24.8 -27% $ 243 -27% Auga Citation X Cessna 10% 29 31 4% 19 53% S 10.9 $ 13.3 48% $ 188 -42% Mar-06 Faccrt 50E% Dassault 20% 20 21 -6% 6 233% $ 10.0 $ 158 -33% $ 18.0 -45% Aug-06 Gilts-ream 6400 ~ream 15% 34 35 4% 19 79% $ 13.7 5 15.3 40% $ 17.8 -22% Mar-0S Medium GaSfream G-1032 G:gleam 19% 15 16 4% 14 7% 5 5.9 5 7.0 45% S 110 -46% Mar-06 Hawker 800XP Hawker Beechcraft 14% 65 65 0% 24 171% $ 13.7 $ 9.0 -25%S 9.1 41% Jan-08 Lanett60 i6OXR Gombarder 23% 84 80 5% 39 115% S 5.9 $ 7.6 -22%S 77 -23% ann-08 Self Light Excel XIS Cessna 11% 80 78 3% 37 116% 6.0 $ 8.5 -30%5 95 47% May-06 Lem« ;43xR Boransfder 12% 47 50 4% 24 96% $ 5.4 72 -24%$ 78 -30% May47 Light Hatchet 400AL Hawser Beechcraft 18% 56 58 .3% 41 37% $ 2.1 $ 32 45% $ 35 -40% Jan46 Diann CD/ CJI• Cessna 18% 53 56 -5% 34 56% $ 32 $ 3$ -17% 5 33 -17% May478 Citation CJ2i CJ2* Cessna 15% 58 63 4% 26 123% 5 4.6 $ 5.0 4% 5 5.3 -14% Fe005 Gunn Emcee Cessna 11% 25 25 0% 16 56% $ 5.9 $ 7.1 -16% S 7A -19% Sep-07 Leone( 40 i 40%9 Borrbander 10% 12 14 -14% 8 50% $ 8.1 nia eVa 5 83 -29% Jul-06 Primer Hawker Beedx7aft 13% 35 33 6% 26 35% $ 3.7 $ 4.5 -17% 5 4.7 .22% Jan46 Comer, CJ3 Cessna 1% 23 26 -12% 11 109% $ 71 3 ).4 4% $ 60 -11% Jan-08 1. Global Express *so includes Express 5000 and Express %RS 2. Gultstream G-100 also includes Aska 11255PX 3. Canon Excel also iddes XIS/ XIS.. 4. Bead* 400A does rick include Hat 400%P. Much had 15 arcraft available b sa this not 5. This column represents Ole maximum average pro actseved snce 2005 for each aircraft model. Note: Analysis excludes new aircraft delivery postrons. Source: JETNET and L8S estrrates J657 EFTA_R1_01520332 EFTA02444126 U93 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 S5 11131313111113 3 3 3 Available Inventory R3M Average Mang Price (RHS) Source: Jetlet and UBS estrnates 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 BOOXP Rolling Three-Month Average Asking Price 80 $11.0 70 - • $10.5 $10.0 I B0 50 - $35 I Ig. 40 $9.0 = S - $8.5 20 - - $8.0 10 • $7.5 0 $7.0 - - ,Avalatile Inventory H 31 R3M Average Asking Pace HS) Source: Jegiel and UBS esemates J658 EFTA_R1_01520333 EFTA02444127 U93 Business MtUM* 10 Aim 2009 Medium Large We estimate the average asking price %r 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 $18 30 $17 a $16 25 .6. 20 $15 p 115 Ar\e„N ril\i" $14 I 10 $13 $ 512 3 0 $11 0 ri 4 4 4 4 4 4 0 9 3 2 z -1 4U4 41 -1 4&if Avaiable Inverday MI Average Asking Price (NHS) Source. Jet et and UPS estmates 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-1VSP Rolling Three-Month Average Asking Price 40 ( $34 35 - 32 $30 a $28 2 $26 iP - $24 vA fl - $22 - $20 $18 11111111111111131 Available Inventory Ft3k1 Average Asking Price (RIC) Source: JetNet and UBS estimates UBS 9 EFTA_R1_01520334 EFTA02444128 U93 BusInas JetUS* 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 pan 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. U6510 EFTA_R1_01520335 EFTA02444129 UBS BusinnsJoi Update 10.kine2002 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 www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past perfomtance 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% .' 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Company Disclosures Company Name Reuters 12-mo rating Short-term rating Price Price date General Dynamics Corp." GD.N Neutral N/A US$59.25 09 Jun 2009 ore. Textron Inc.'''' s• Ba• "• 7*". 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. UBS 12 EFTA_R1_01520337 EFTA02444131 UBS Business JM 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