More than a month after manufacturer of aircraft interiors B/E Aerospace (NASDAQ: BEAV ) first confirmed the rumors that it was for sale, not a single serious bidder has stepped up to the plate.
According to Bloomberg, France-based aircraft part suppliers Safran SA and Zodiac Aerospace were both potential bidders for B/E, after management of the latter confirmed the company was for sale. Not a peep has been heard out of either French companies since. Airplane builder Airbus (NASDAQOTH: EADSY ) publicly denied interest in acquiring B/E in early May. A few weeks later, German aerospace supplier Diehl did likewise.
So, now that apparently no one in the entire global airplane industry is interested in buying it, B/E announced this morning that it's going to just split itself into two parts in hopes of generating some value for shareholders that way. Will it work?
In a statement this morning, B/E outlined how it intends to divvy up its loot among shareholders, in a tax-free distribution set to take place in Q1 2015. The first half, which is what we today think of as B/E and what the company now dubs Manufacturing Co., will be the company's marquee airplane interiors business. This is the company that builds the innards of aircraft -- what you see when you enter the cabin of your Boeing (NYSE: BA ) or Airbus passenger jet, and start hunting up and down the aisles for your seat -- or make a quick visit to the lavatory.
With $2.5 billion in annual sales and $510 million in annual earnings before interest, tax, depreciation and amortization, or EBITDA, B/E says this business is earning EBITDA profit margins of 20.4%.
The other half of B/E, which includes the world's largest distribution business for the bolts and fasteners that hold airplanes together, as well as other "consumable" parts sales and aircraft services, will be monikered Services Co. B/E says this business did $1.6 billion in sales over the past year, and earned $365 million EBITDA thereon -- so about a 22.8% EBITDA margin.
So far, so good. But now we get to the tricky part: Are either of these two new, soon-to-be-separate companies worth buying?
Anyone? Anyone? Bueller?
For the life of me, I can't imagine why anyone would want to. While B/E Aerospace is certainly a fine business either as a whole or in parts -- it quite simply costs too much for an investor to profit from an investment in it.
Consider B/E's so-called Manufacturing Co. Entire and unsplit, B/E as a unified whole sells for 25.5 times trailing earnings, for a company which (according to S&P Capital IQ data) earns a 21.4% EBITDA profit margin. But Manufacturing Co. will supposedly be less profitable than that, with an EBITDA margin of only 20.4%.
With thousands of civilian planes sitting in the work backlogs of Airbus and Boeing, waiting to be outfitted by B/E, I see strong growth prospects for Manufacturing Co. But I can't imagine the part fetching a better valuation than the whole -- not if it's less profitable than the whole.
And consider the case of Services Co. Here we've got a modestly more profitable business, earning a 22.8% EBITDA margin. On the one hand, you might think this would win Services Co a P/E ratio superior to the 25.5 P/E at B/E as a whole. But rival fasteners producer Precision Castparts (NYSE: PCP ) sells for only 22.5 times earnings, making B/E more expensive. And Precision Castparts boasts an EBITDA profit margin of 30.8%!
If the idea of paying 13% more for a company that's 26% less profitable than Precision Castparts doesn't appeal to you -- then congratulations. I think you've just figured out why no one has bid to buy B/E so far.
As for the chances of someone paying a premium for B/E now that it's promised to split -- well, I'm not too keen on that prospect, either. Even if B/E succeeds in hitting the 19% long-term-growth target that analysts have set for it, the stock looks expensive at 25.5 times earnings. And S&P Capital IQ data reveal that the company is generating only about $202 million in free cash flow annually, or barely half of what B/E reports as its "net income" under GAAP.
Together as a whole, or split into pieces, this stock is quite simply too expensive to buy.
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