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UBS Investment Research
UBS Business Jet Survey
Less Worse, Not Better
Index higher again
Our September Business Jet Market Index came in at 43, 16% higher from ourprior survey in July and the sixth consecutive move higher, indicative of continuedslowing in the rate of market deterioration. Our index continues to be weigheddown by weak pricing and record high used inventory levels and has not yetcrossed the 50 threshold indicative of actual improvement in market conditions thathas historically led meaningful upside for the stocks (Chart 1). However, ourstraight up measure of absolute business conditions has begun to show someincremental improvement, increasing to 3.2.
Improved interest and financing driving upside
Overall, we think our survey continues to reflect increasing customer interest onthe back of 30-40% price declines along with what appears to be improvedfinancing availability. Despite incremental buyer interest at these levels, we think significant oversupply of high quality used aircraft will continue to overhang newaircraft orders.
Prefer BBD
We still think the business jet market is characterized by significant oversupply,weak pricing, and tight financing. While our key indicators indicate the market isless worse from earlier this year, we still see risk of an extended downturn. Wemaintain our Buy rating on BBD as we estimate the transport segment is worth $3alone, and see the aero segment as well placed to weather the downturn from aliquidity/productivity perspective. We prefer TXT to GD, although we maintainNeutral ratings on both.
Global Equity Research
Americas
Aerospace
Sector Comment
18 September 2009
www.ubs.com/investmentresearch
David E. Strauss
Cristina Fernandez
Darryl Genovesi
Fadi Chamoun, CFA
Tasneem Azim
Chart 1: UBS Business Jet Market Index Chart 2: Overall Business Conditions Score
645758396866636667616463556154482939262537431320354858616554
050100
M a r - 0 3 S e p - 0 3 M a y - 0 4 J a n - 0 5 S e p - 0 5 M a y - 0 6 M a r - 0 7 N o v - 0 7 J u n - 0 8 J a n - 0 9 S e p - 0 9
S u r v e y I n d e x
050100150200250300350400
S t o c k s
UBS Business Jet Market Index * Stocks (RHS)
4.73.22.62.42.73.25.25.66.26.46.26.46.36.36.36.16.46.56.26.05.85.34.35.15.4
0510
S e p - 0 3 J a n - 0 4 M a y - 0 4 S e p - 0 4 J a n - 0 5 M a y - 0 5 S e p - 0 5 J a n - 0 6 M a y - 0 6 N o v - 0 6 M a r - 0 7 J u n - 0 7 N o v - 0 7 F e b - 0 8 J u n - 0 8 N o v - 0 8 J a n - 0 9 M a y - 0 9 S e p - 0 9 B u s i n e s s C o n d i t i o n s S c o r e
* Simple average stock price performance index includes GD/TXTSource: UBS Business Jet Survey #1-41Source: UBS Business Jet Survey #1-41
This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 17.
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in makingtheir investment decision.
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UBS Business Jet Survey
18 September 2009UBS
2
Business Jet Market Survey
Our UBS Business Jet Market Survey is designed to supplement and enhanceour existing Business Jet Monthly report by providing timely data supplieddirectly by business jet market professionals. We received 170 responses frombroker/dealers, manufacturers, fractional providers, financiers and others.
Investment Conclusion
Our September Business Jet Market Index came in at 43, 16% higher from ourprior survey in July and the sixth consecutive move higher, indicating continuedslowing in the rate of market deterioration. While our index, which is weigheddown by weak pricing and high inventories doesn’t yet indicate stabilization, ourstraight up measure of absolute business conditions has begun to show someincremental improvement, increasing 20% this time to 3.2.Overall, we think our survey continues to reflect increasing customer interest onthe back of 30-40% price declines along with what appears to be improvedfinancing availability. Despite incremental buyer interest, we think significantoversupply of high quality used aircraft will continue to overhang new aircraftorders.Our index measures the change in our respondents’ views from our prior surveyand is not meant to be an absolute measure of business conditions. Our indexmoved 16% higher this time, driven by improvements in four of our fivecomponent scores, including Customer Interest, Pricing, 12 Month Outlook andWillingness to Increase Inventory. Our inventory score declined this month andremains well below 50 indicating extraordinarily high overall inventory levels.Our young inventory score, although not a component of our composite index,increased this time, but also remains well below 50, while our financing scorecame in at 58, indicating improved financing availability since July.
Table 1: UBS Business Jet Survey Results and Comparison to Prior Survey
Component Better Same Worse Score Last Time Change
Interest 56% 35% 9% 74 63 17%Pricing 5% 50% 45% 30 21 46%Outlook 63% 32% 6% 78 74 6%Inventory 1% 3% 97% 2 4 -43%Willingness 20% 44% 36% 42 38 11%
Composite Index 26% 34% 40% 43 37 16%
Young Inventory 2% 13% 85% 8 4 103%Financing 22% 71% 7% 58 57 1%
Business Conditions n/a n/a n/a 3.2 2.7 20%
Source: UBS Business Jet Survey #40-41
Overall, we still think the current business jet market is characterized bysignificant oversupply, weak pricing, and tight financing. While our keyindicators and contacts now indicate modest improvement off the bottom, westill see risk of an extended downturn. We maintain our Buy rating on BBD aswe estimate the transport segment is worth $3 alone, and see the aero segment aswell placed to weather the downturn from a liquidity/productivity perspective.We prefer TXT to GD, although we maintain Neutral ratings on both.
UBS Business Jet Survey
18 September 2009UBS
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TXT has rallied and in our view no longer reflects any discount related to TFC,now trading at a significant premium to GD and in line with where it tradedduring the prior business jet recovery in 2003-04. We don’t see TXT’s multipleexpanding much from here with EPS growth the driver of further upside for thestock. Strong EPS growth for TXT is unlikely without a meaningful recovery inbusiness jets, which to us remains uncertain at this point.
Chart 3: GD and TXT Forward PE Multiples
0x5x10x15x20x25x30x
S e p - 9 1 S e p - 9 2 S e p - 9 3 S e p - 9 4 S e p - 9 5 S e p - 9 6 S e p - 9 7 S e p - 9 8 S e p - 9 9 S e p - 0 0 S e p - 0 1 S e p - 0 2 S e p - 0 3 S e p - 0 4 S e p - 0 5 S e p - 0 6 S e p - 0 7 S e p - 0 8 S e p - 0 9 E
F o r w a r d P / E M u l t i p l e
GDTXT
Note: Forward PE using rolling 12-month (actual) EPS through June 2009 and UBS estimates for future periods.TXT PE multiple for the current period reflects our 2010 estimate. Source: UBS estimates
UBS Business Jet Market Index
Our UBS Business Jet Market Index is a proprietary index designed to measurethe total “value” of the responses to our monthly survey questions. We haveweighted each factor in our index based on our perception of its overallimportance to the condition of the business jet market. Our index is scored on ascale of zero to 100, with 51-100 representing incrementally strengtheningmarket conditions, 50 incrementally stable market conditions, and 0-49incrementally weakening market conditions. Our September Index came in at43, 16% higher from July. While our index is still below 50, reflecting continueddeterioration in market conditions, this sixth consecutive move higher indicatesthat the rate of deterioration continues to slow.
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