1、DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be awar
2、e 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.23 January 2019Americas/United StatesEquity ResearchAerospace&Defense Aerospace&Defense PRE RESULTS COMME
3、NTResearch AnalystsRobert Spingarn212 538 1895robert.spingarncredit-Jose Caiado212 325 6771jose.caiadocredit-Audrey Preston212 325 2709audrey.prestoncredit-Scott Deuschle212 325 6116scott.deuschlecredit-Q418 Defense Preview:The Differences are MarginalFor our 2019 Defense/Fed IT macro view and expec
4、tations,see our note 2019 Defense Outlook:For Whom the Bell Tolls Revisited.2019 Margin Guidance is Key Relative Unknown:We expect solid Y/Y growth to continue for most names in Q4(with the exception of LMT,which had one less calendar week than the PYQ),as outlays from strong 2018/2019 appropriation
5、s bills continue to track upward.So with 2018 largely known and in the rearview at this point,the focus will naturally be on 2019 guidance.Here,well look for broadly similar top-line growth rates across Defense hardware,in the 5-8%(organic)range.Margin trajectories is where we expect greater differe
6、nces,with certain names(HRS,LLL,NOC)likely to see Y/Y segment margin improvement due either to ongoing cost cutting efforts or to portfolio maturation,while others(LMT,RTN,GD)struggle to hold the line on margins,or even see some modest declines as modernization(or other factors for GD)creates mix he
7、adwinds.Capex has been telegraphed to remain elevated for most names,limiting FCF growth for 19,with 20 offering the start of capex normalization.Partial Shutdown Leaves Defense Hardware Relatively Secure:As DoD is a funded agency for GFY19,hardware contractors should not generally be affected by th
8、e shutdown,except(1)to the degree that they have exposure to shutdown-impacted civilian agencies and(2)to the extent that the shutdown increases future funding uncertainty,leading DoD to horde longer-cycle budget authority.Regarding(1),we note that GD IT has some vulnerability,particularly after the
9、 acquisition of CSRA(55%Civil per 2017 10K).LLL has some downside from L3 Security and Detection Systems,which sells into TSA(4%of LLLs 2017 sales came from non-DoD U.S.government agencies),though any lost sales here are likely to be timing related and recoverable.HRS does not appear to be exposed,a
10、s its FAA work is largely mission critical,and therefore will proceed independent of the shutdown.RTN and NOC perform some work for civilian agencies(e.g.NASA,intelligence agencies),but we believe this is generally either mission critical work and/or can proceed for some time without interruption.Fe
11、d IT More Vulnerable:We see moderately greater exposure for our Federal IT names(BAH,LDOS,CACI,MANT)as well as GD,which generate 15%+of their revenues from non-DoD agencies,a portion of which are impacted by the shutdown.While the impact to CY Q4 results should be generally immaterial(as the partial
12、 shutdown largely started over the holidays),we do expect some financial impact to Fed IT CYQ1 financial results(revs,margins,cash collections,bookings),which could become more material if the shutdown drags on beyond January.However,the fact that this is a partial shutdown(impacting only a portion
13、of the contractors civil portfolio,which itself is a minority of overall revenues),and that backlogs are at record levels(allowing for the re-allocation of workers)should help mitigate the impact to top and bottom line,at least as compared to the per day impact from the whole government shutdown in
14、2013.See Figure 1 for non-DoD revenue exposures for Fed IT names.23 January 2019Aerospace&Defense2Figure 1:FY17 Non-DoD Federal Government Revenue Share*27%27%33%18%16%0%5%10%15%20%25%30%35%BAHCACILDOSMANTGD*Source:Company data,Credit Suisse estimates*Percentages above exclude intelligence agency ex
15、posure for BAH and MANT.CACI,LDOS,and GD percentages include intelligence agency revenues.*GD data for 2017 is presented on a pro forma basis to include the impact of CSRA.Includes$2.85B in 2017 legacy GD non-DoD US Government sales and$2.74B in 2017 CSRA civilian agency sales.Capital Allocation:In
16、light of recent stock market weakness,we expect many contractors to become more aggressive on capital allocation,with a focus toward buybacks.Share repurchases could contribute to EPS beats in the quarter,depending on how aggressive contractors were during Q4 market weakness.Pension Contribution Gui
17、dance:Another focus for investors will be on pension-associated cash flows.While CAS has been pretty well telegraphed by most contractors as remaining elevated and steady through the mid-2020s(with the exception of HII,where CAS is expected to decline in 19),we note that ERISA contributions are susc
18、eptible to greater variability.Here,2018s market weakness will likely have a negative impact on plan funding status,perhaps resulting in more short lived pension funding holidays for 19/20.This could create headwinds to OCF forecasts and potential downside to out-year FCF estimates,other things bein
19、g equal.Greater Scrutiny on Out Year Trends:With 2018 moving into the rear view and 2019 clarifying with guidance introductions/refinements,we anticipate that the questions on earnings calls and the topic of debate for investors will begin to focus more on 2020 and 2021.Key here will be the pace of
20、out-year revenue growth as well as the trajectory for margins.Pension cash flows will also be important(see previous point).We will look to 10K filings for color on pension status.The timing and pace of capex normalization will also be a key question on earnings calls,as this trend will help sustain
21、 FCF growth as relative pension tailwinds decline for some contractors beyond 2020.OCO Exposures:For most names,we expect either prepared remarks or the Q&A to offer insight into OCO/war theater exposures given the Administrations latest withdrawal strategy.This is likely to apply across hardware na
22、mes as well as services contractors,some of whom have exposure to overseas operations.23 January 2019Aerospace&Defense3Partial Government Shutdown ExposuresFed IT 2013 Government Shutdown Earnings Remarks:To inform a view on the impact of the 18/19 shutdown,it is helpful to examine how each company
23、fared through the last shutdown,even though it is not an apples-to-apples compare.In the quarter following the 2013 shutdown,we note that a number of names in our Fed IT coverage reduced guidance for the year,which they attributed in whole or in part to the government shutdown.Selected CYQ413 earnin
24、gs call remarks are included below.Again,we note that while the current shutdown is longer,it is a partial shutdown and therefore to date is likely to prove less severe than the 2013 complete government shutdown.However,length of a shutdown can offset scope,so the financial repercussions if the curr
25、ent shutdown could begin to approach similar levels as it extends further into the year.BAH,Samuel Strickland,former CFO:“Last quarter,I told you that I anticipated the October government shutdown would have a roughly$30 million impact to revenue,and in fact we did see that in the third quarterIn th
26、e third quarter of fiscal 2014,operating income decreased to$97 million from$116.6 million in the prior year period,and adjusted operating income decreased to$99.1 million from$120.8 million in the prior year period.The decrease in operating income and adjusted operating income was primarily driven
27、by the combination of headcount reductions and an increase in unbillable labor as a result of the government shutdown.Our days sales outstanding were 66 days for the quarter ended December 31,2013,which is consistent with the prior quarter,but increased slightly over the prior year period,due largel
28、y to the impact of the government shutdown.”CACI:Ken Asbury,CEO:“As Tom will point out in a few moments,the recent 16-day government shutdown did not have a material impact on our business.And as we said when we first issued our guidance in June,we continue to assume the U.S.government will operate
29、under sequestration as required by current law and CRs throughout the current fiscal environment.This includes the net impact of the government shutdown,which we estimate to be$10 million in revenue and$4 million in operating income.”LDOS:John P.Jumper,former CEO:“In October,we experienced a signifi
30、cant decline in collections from the government,driven by the government shutdown,our own planned IT shutdown to enable our separation,and customer confusion driven by our name change.The combination of these factors resulted in a substantial change in our working capital usage,adversely impacting o
31、ur operating cash flow in Q3 and extends into our forecast for the fourth quarter.”MANT:Kevin Phillips,CEO:“we are adjusting the guidance that we gave on the last call based on three unanticipated factors.The first factor is the government shutdown.At peak levels,we had more than 1,200 employees una
32、ble to charge their contracts in the fourth quarter as a result of the shutdown.Many intelligence customers who have previously been immune to furloughs or shutdowns were closed the entire 16-day period,temporarily ceasing their sensitive missions.The second factor is the continued slowdown in the a
33、wards and start-ups on awards due to the shutdown.Orders have been slow so far in the fourth quarter,as the shutdown has exacerbated delays in RFPs and contract awards.”23 January 2019Aerospace&Defense4Americas/United StatesAerospace&Defense General Dynamics Corporation(GD)RatingOUTPERFORMPrice(18-J
34、an-19,US$)168.58Target price(US$)190.0052-week price range(US$)229.95-148.21Market cap(US$m)49,925Enterprise value(US$m)59,221Target price is for 12 months.Research AnalystsRobert Spingarn212 538 1895robert.spingarncredit-Jose Caiado212 325 6771jose.caiadocredit-Audrey Preston212 325 2709audrey.pres
35、toncredit-Scott Deuschle212 325 6116scott.deuschlecredit-Gulfstream,GDIT in Focus for 2019GD will report before the open on January 30th,with a call to follow at 9:00AM.Numbers to Look For:Investors will focus on margins for GDIT and Aerospace,which are likely to show the greatest variability both i
36、n the quarter and into 2019.Here,we are looking for Aerospace margins of 14.7%for Q4 as deliveries of the G500 ramp with a margin dilutive impact for the first few lots.GD IT,meanwhile,should see a sequential recovery in margins to 7.8%(+100bps Q/Q)as cost savings are realized and the company sees l
37、ower charges.For 2019,we expect these two trends to continue,with Aerospace margins down 200bps Y/Y(to 15.75%)while GDIT margins inflect upwards on the relative absence of charges and the beginnings of cost synergies.We see marine margins down 30bps Y/Y(on Columbia ramp),offset by 30bps of margin im
38、provement in Mission Systems and Combat Systems as the two segments see beneficial incremental margins on legacy programs.Overall,we expect this to drive 5.9%Y/Y EPS growth,vs 8.2%Y/Y EPS growth embedded in consensus.For the call,we expect some commentary regarding the impact of the partial governme
39、nt shutdown,to which GD has greater exposure than other defense large caps,owing to the acquisition of CSRA(55%civil per CSRA 2017 10K)and legacy GD IT.Reminder from Last Quarter:Revenues of$9.1B missed consensus by 3%,while margins were stronger than expected at 12.5%and EBIT came in 1%below expect
40、ations.Adjusted EPS of$2.89 beat consensus by 13-cents(+5%),though EPS missed by 1-cent after accounting for lower tax.The tax rate dipped to 15.5%,resulting in a 14-cent tailwind to EPS.Estimates:We increase our 19/20 EPS estimates to$11.78/$13.60 on minor model maintenance.Risks include DoD budget
41、 risk,execution,and integration issues.Share price performanceGD.NS&P 500 INDEXApr-18Jul-18Oct-18Jan-19140160180200220240On 18-Jan-2019 the S&P 500 INDEX closed at 2670.71Daily Jan22,2018-Jan18,2019,01/22/18=US$208.2Quarterly EPSQ1Q2Q3Q42017A2.482.452.51 2.502018E2.652.622.89 2.972019E-Financial and
42、 valuation metricsYear12/17A12/18E12/19E12/20EEPS(CS adj.)(US$)9.9511.1311.7813.60Prev.EPS(US$)9.49-11.7713.58P/E rel.(%)83.492.192.288.6Revenue(US$m)30,973.036,218.039,071.041,404.9EBITDA(US$m)4,629.05,128.55,458.75,960.2OCFPS(US$)12.7312.7314.1915.63P/OCF(x)16.013.211.910.8EV/EBITDA(current)13.412
43、.111.310.4Net debt(US$m)9999,2968,2896,845ROIC(%)24.0616.2616.7918.36 Number of shares(m)296.15IC(current,US$m)12,434.00BV/share(Next Qtr.,US$)43.9EV/IC(x)2.8Net debt (Next Qtr.,US$m)7,599.9Dividend(current,US$)3.72Net debt/tot eq(Next Qtr.,%)57.8Source:Company data,Thomson Reuters,Credit Suisse est
44、imates23 January 2019Aerospace&Defense5General Dynamics Corporation (GD)Price(18 Jan 2019):US$168.58;Rating:OUTPERFORM;Target Price:190.00;Analyst:Robert SpingarnIncome Statement12/17A12/18E12/19E12/20ERevenue(US$m)30,973.036,218.039,071.041,404.9EBITDA(US$m)4,6295,1285,4595,960Depr.&amort.(441)(674
45、)(772)(788)EBIT(US$)4,1884,4544,6875,173Net interest exp(103)(355)(378)(313)PBT(US$)4,0774,0744,3094,860Income taxes(1,165)(737)(840)(948)Profit after tax2,9123,3373,4693,912Minorities-Reported net income(US$)3,0313,3373,4693,912Other NPAT adjustments0000Adjusted net income3,0313,3373,4693,912Cash F
46、low12/17A12/18E12/19E12/20EEBIT4,1884,4544,6875,173Net interest(103)(355)(378)(313)Change in working capital(443)(378)(214)(304)CAPEX(428)(616)(742)(787)Free cashflow to the firm3,4513,2023,4343,709Acquisitions(399)(10,039)00Divestments-Cash flow from investments(791)(10,486)(742)(787)Changes in Net
47、 Cash/Debt555(8,297)1,0071,444Balance Sheet(US$)12/17A12/18E12/19E12/20EAssetsCash&cash equivalents2,9833,9003,2352,179Total current assets18,27620,58120,70720,121Total assets34,99438,87940,06639,378LiabilitiesTotal current liabilities13,04713,80716,88117,547Total liabilities23,55925,73625,88123,547
48、Total liabilities and equity34,99438,87940,06639,378Net debt9999,2968,2896,845Per share12/17A12/18E12/19E12/20ENo.of shares(wtd avg)305300294288CS adj.EPS9.9511.1311.7813.60Prev.EPS (US$)9.49-11.7713.58Dividend(US$)3.273.634.004.40Free cash flow per share11.3310.6811.6712.90Earnings12/17A12/18E12/19
49、E12/20ESales growth(%)1.316.97.96.0EBIT growth(%)12.26.45.210.4Net profit growth(%)21.910.13.912.8EPS growth(%)24.111.95.915.4EBITDA margin(%)14.914.214.014.4EBIT margin(%)13.512.312.012.5Pretax margin(%)13.211.211.011.7Net margin(%)9.89.28.99.4Valuation12/17A12/18E12/19E12/20EEV/Sales(x)1.641.641.4
50、91.37EV/EBITDA(x)13.412.111.310.4EV/EBIT(x)12.213.312.411.0P/E(x)16.915.114.312.4Price to book(x)4.53.83.53.1Asset turnover0.90.91.01.1Returns12/17A12/18E12/19E12/20EROE stated-return on(%)27.927.225.426.1ROIC(%)24.116.316.818.4Gearing12/17A12/18E12/19E12/20ENet debt/equity(%)8.770.758.443.2Interest
