No One Else Wants to Buy B/E Aerospace, So Why Should You?

With an embarrassing dearth of bidders for its business, B/E opts to split in two.

Jun 10, 2014 at 1:15PM

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?

The details
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%!

Foolish takeaway
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.

B/E won't make you money, but this stock could
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Precision Castparts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information