Professor Michael Lord Comments on B/E Aerospace’s Public Offering of its Senior Notes

B/E to sell senior notes
Originally Posted Sept. 14 | By Richard Craver
Reposted from the Winston-Salem Journal

B/E Aerospace Inc. is taking a strike-while-it's-hot approach to its expansion plans.

The company said yesterday that it plans to raise $500 million in a public offering of its senior notes. The announcement spurred the company's share price to a 52-week high of $32.25 before closing up $1.30 to $32.10.

B/E, based in Wellington, Fla., has its largest American operation near Smith Reynolds Airport in Winston-Salem, with more than 800 workers in its commercial aircraft segment.

The company is likely to use the net proceeds from the offering to buy companies in two of its business segments — commercial aircraft and consumables management segments.

"The company is currently exploring or participating in discussions with third parties regarding a number of possible acquisitions," B/E said in a statement. "However, it presently has no definitive agreements related to any acquisitions."

Michael Baughan, its president and chief operating officer, said that the offering is expected to be priced and completed within a week. Baughan is based in Winston-Salem.

Baughan said he could not comment on whether local operations would benefit from any major purchase. In June 2008, B/E bought a unit of Honeywell International Inc. for $1.05 billion — its single largest purchase.

"It's possible, probably likely, that they have specific targets in mind," said Michael Lord, an associate professor of management at Wake Forest University,

"It's also quite possible that they've looked at the general industry situation and determined that there may be more than one valuable asset available at a good price."

B/E has demonstrated considerable earnings strength despite the recession's effect on the global airline industry.

On July 27, it reported having a 7 percent increase in net income, to $37.3 million, in the second quarter. It expects 2010 revenues to about equal those in 2009 of $1.94 billion. It also raised — for the second consecutive quarter — its earnings guidance for fiscal 2010 by 5 cents to $1.50 a share, excluding one-time charges.

RBC Capital Markets initiated coverage of B/E last week as a "top pick" with a $36 share-price target.

"B/E Aerospace has one of the highest exposures to the continued recovery in commercial aerospace in our coverage universe," analysts Rama Bondada and Robert Stallard said in a report.

"Although the stock has had a strong run since the spring of 2009 and enjoys a premium valuation relative to its peers, we think that the company has the ability to deliver above-average earnings growth."

Myles Walton, an analyst with Deutsche Bank, said in a report he believes B/E would benefit from two Obama administration proposals: making permanent tax credits for research and development; and spending $50 billion on rebuilding roads, railways and airports.

Those proposals are unlikely to be passed by Congress this year.

Walton, who has B/E rated as "Buy," said that the company would gain the most from the research and development tax credit of the publicly traded companies in its sector.