Defense contractors

[Xerxes]

Listening to webcast now for RTX. Don’t think share price is going to “run away” from here … I ll post anything I see interesting on AW

[Spekulatius]

45 minutes ago, Xerxes said:

Listening to webcast now for RTX. Don’t think share price is going to “run away” from here … I ll post anything I see interesting on AW

It’s pretty much a 2 year project to work through these engine issues. Nevertheless, I added a few shares today.

[Xerxes]

13 hours ago, Spekulatius said:

It’s pretty much a 2 year project to work through these engine issues. Nevertheless, I added a few shares today.

full disclosure

i add this morning at $73 or so and increase my ownership by 35%. Probably dead money for a few years but I need to do a portion of my RRSP for the year. 
 

portfolio allocation is still around ~3% or so 
 

i considered this as critical infrastructure asset. The narrative upended by GTF (and for good reason) but there is more to it than that. The company will have a chance to show in late 2024, that I can generate cash in Collins and Raytheon and hopefully put in place an accelerated share repurchase once they got a good handle on the current concern issue.  
 

 

[Dinar]

31 minutes ago, Xerxes said:

full disclosure

i add this morning at $73 or so and increase my ownership by 35%. Probably dead money for a few years but I need to do a portion of my RRSP for the year. 
 

portfolio allocation is still around ~3% or so 
 

i considered this as critical infrastructure asset. The narrative upended by GTF (and for good reason) but there is more to it than that. The company will have a chance to show in late 2024, that I can generate cash in Collins and Raytheon and hopefully put in place an accelerated share repurchase once they got a good handle on the current concern issue.  
 

 

Isn't the earnings quality lousy?  A bunch of operating income comes from pensions, no?  Also, given the engine issues, should we not increase discount rate since the business is riskier than perhaps we thought in the past?

[Xerxes]

1 hour ago, Dinar said:

Isn't the earnings quality lousy?  A bunch of operating income comes from pensions, no?  Also, given the engine issues, should we not increase discount rate since the business is riskier than perhaps we thought in the past?

definitely not a high confidence buy but rather a I-need-to-plug-my-RRSP end of the year. 
 

the business is very straightforward (three businesses) vs (the pre-break up GE) but it is the product that is highly complex. And the scale of it is humbling. What makes you think that you won’t see similar blackswan on the LEAPs from SAFRAN/GE at some point. 

 

at the end of the day, the engines will be around just like the venerable V2500 that were introduced several decades ago. They need to bite the bullet and invest into h/w upgrades and get it right. No way around it. No half measures.  
 

 

ps: in 2020 the aerospace sector had a demand concern at large. Today the demand is there. 

Edited September 12, 2023 by Xerxes

[Dinar]

@Xerxes, I agree 100% with you regarding the risk at Safran (which I own.)  That's why Safran is a 5% position and not a 10% position.  The way I deal with it also is that in my back of the envelope DCF, I assume Safran's unlevered cost of capital = inflation + 6%.   I have always been worried about this given troubles at Rolls Royce.  

[sleepydragon]

When I invested in Rolls Royce a few years back, and lost money, it taught me a few things about airplane engines. Nowadays, they try so hard to make the engines carry so big a plane using the least oil, it’s a technological marvel. The temperature inside the engine is so hot that it will melt the blades in seconds if they didn’t have those holes on the blades. These problems is never going to just one, more will always come.

 

[Xerxes]

17 minutes ago, sleepydragon said:

When I invested in Rolls Royce a few years back, and lost money, it taught me a few things about airplane engines. Nowadays, they try so hard to make the engines carry so big a plane using the least oil, it’s a technological marvel. The temperature inside the engine is so hot that it will melt the blades in seconds if they didn’t have those holes on the blades. These problems is never going to just one, more will always come.

 

respectfully disagree. 
 

What undid Rolls-Royce was a business decision nothing to do with their technological roadmap. 
 

In early 2010s, Rolls-Royce sold its equity ownership of the IAE to P&W, their joint venture for the V2500 engines. And soon after completely bowed out of the narrow body segment. Never to see it again. 
 

They self-selected to remove themselves from the most lucrative part of aviation propulsion, leaving the field to GE/SAFRAN and P&W. And forgo further investment. 

 

Rolls-Royce today has a dominant position on wide-bodies. But that won’t do them much good either sense the “centre of gravity” of what the market wants has been steadily moving toward larger narrow bodies and away from wide-bodies. Think going from A.380/B747/777 to A.350/B787 and now to A.321.

 

Lastly Rolls-Royce did not have any scale. You need a conglomerate to be able to maintain the massive financial firepower. 

 

Sure, the technology and the maintenance requirement behind these engines can undo most companies. That is what makes them unique and hard to replicate and provide their moat. it is not hard to build an aircraft, but building engines, maintaining that MRO network is another matter. 
 

but it is not that technology that undid Rolls-Royce. It was its lack of scale and their business decision to abdicate further investment in the narrow body. 

[Xerxes]

19 hours ago, Dinar said:

@Xerxes, I agree 100% with you regarding the risk at Safran (which I own.)  That's why Safran is a 5% position and not a 10% position.  The way I deal with it also is that in my back of the envelope DCF, I assume Safran's unlevered cost of capital = inflation + 6%.   I have always been worried about this given troubles at Rolls Royce.  

On SAFRAN, I think they own the “cold section” vs. GE owning the high pressure “hot section” of the CFM/LEAP. So I am thinking perhaps SAFRAN owns the less complicated part compared to their partner. Relatively speaking.  

[Spekulatius]

30 minutes ago, Xerxes said:

respectfully disagree. 
 

What undid Rolls-Royce was a business decision nothing to do with their technological roadmap. 
 

In early 2010s, Rolls-Royce sold its equity ownership of the IAE to P&W, their joint venture for the V2500 engines. And soon after completely bowed out of the narrow body segment. Never to see it again. 
 

They self-selected to remove themselves from the most lucrative part of aviation propulsion, leaving the field to GE/SAFRAN and P&W. And forgo further investment. 

 

Rolls-Royce today has a dominant position on wide-bodies. But that won’t do them much good either sense the “centre of gravity” of what the market wants has been steadily moving toward larger narrow bodies and away from wide-bodies. Think going from A.380/B747/777 to A.350/B787 and now to A.321.

 

Lastly Rolls-Royce did not have any scale. You need a conglomerate to be able to maintain the massive financial firepower. 

 

Sure, the technology and the maintenance requirement behind these engines can undo most companies. That is what makes them unique and hard to replicate and provide their moat. it is not hard to build an aircraft, but building engines, maintaining that MRO network is another matter. 
 

but it is not that technology that undid Rolls-Royce. It was its lack of scale and their business decision to abdicate further investment in the narrow body. 

For R&R, besides going in the wrong direction (wide body vs narrow body) ,the technical issues with engine reliability, they also had (and still have) a very inefficient manufacturing which results in high cash losses of the engines as sold. They were relying on service revenues to make up for that, but that means that cash flows are backloaded and causes a cash crunch, which had to be resolved with  capital raise.

 

RTX does not have the same issues. Due to their merger with Raytheon, has a stable and growing source of cash besides the air craft engine business, which is enough to fund the business and the dividends. So there is no cash crunch issue with RTX. Similar to @Xerxes, I regard my RTX holding as a critical infrastructure that's not going anywhere (perhaps not up either in the short term). I would have added more at $73 but it never got there so far.

[Dinar]

RTX, in my opinion, has an insanely incompetent CEO and CFO (who was an IR guy before becoming CFO.)  I wonder how good the next layer of management is as well?  This is NOT a business that a moron can run!

[sleepydragon]

1 hour ago, Spekulatius said:

For R&R, besides going in the wrong direction (wide body vs narrow body) ,the technical issues with engine reliability, they also had (and still have) a very inefficient manufacturing which results in high cash losses of the engines as sold. They were relying on service revenues to make up for that, but that means that cash flows are backloaded and causes a cash crunch, which had to be resolved with  capital raise.

 

RTX does not have the same issues. Due to their merger with Raytheon, has a stable and growing source of cash besides the air craft engine business, which is enough to fund the business and the dividends. So there is no cash crunch issue with RTX. Similar to @Xerxes, I regard my RTX holding as a critical infrastructure that's not going anywhere (perhaps not up either in the short term). I would have added more at $73 but it never got there so far.

good points. I just bought some . Didn’t realize it came down so far during the last few weeks

[Spekulatius]

1 hour ago, Dinar said:

RTX, in my opinion, has an insanely incompetent CEO and CFO (who was an IR guy before becoming CFO.)  I wonder how good the next layer of management is as well?  This is NOT a business that a moron can run!

What makes you think the CEO (Hayes) is incompetent? UTX did quite well when he was CEO from 2014-2020. I would even state that the merger with Raytheon was a good capital allocation move, as was the spinoff of Carrier and RESI.

[Dinar]

29 minutes ago, Spekulatius said:

What makes you think the CEO (Hayes) is incompetent? UTX did quite well when he was CEO from 2014-2020. I would even state that the merger with Raytheon was a good capital allocation move, as was the spinoff of Carrier and RESI.

Really?  Why do you think that UTX did quite well from 2014-2020?  I do not recall the company posting good operating performance.   Sure it was good that Carrier & Otis were spun off, but Otis organic revenue growth has been below peers for years.  

[sleepydragon]

On 9/11/2023 at 8:37 PM, Xerxes said:

Listening to webcast now for RTX. Don’t think share price is going to “run away” from here … I ll post anything I see interesting on AW

Yeah, the BOA analyst sounds like he’s very unhappy. He is asking in the call that there’s a culture problem at the engineering dept. I wonder what he knows.

He did just downgraded RTX, calling it a value trap

 

[dealraker]

23 minutes ago, sleepydragon said:

Yeah, the BOA analyst sounds like he’s very unhappy. He is asking in the call that there’s a culture problem at the engineering dept. I wonder what he knows.

He did just downgraded RTX, calling it a value trap

 

Over the years to me BOA seems a momentum house.  When things are bad no price is too low and when good of course the opposite.   

[Xerxes]

17 minutes ago, dealraker said:

Over the years to me BOA seems a momentum house.  When things are bad no price is too low and when good of course the opposite.   

@sleepydragon @dealraker

 

i would say that the Bank of America analyst is a very good one. In fact he was an engineer on the F-15 program IIRC in another life time. I religiously listen to the weekend Aviation and Defense business podcast where he is participating and am looking forward for that episode in about 48 hours. 
 

that said, the analyst price target is of no significance to me, be it from him or another analyst. Whether up or down. What matters to me the thought behind it. And I think that really helps, shape my thinking.

 

At the end of the day what goes into one person private investor’s portfolio is incredibly unique to that one person and his/her circumstances. Whereas analysts upgrade/downgrade has more to do with relative performance versus benchmark. And better suited for professional money manager as inputs. 

[Spekulatius]

1 hour ago, Xerxes said:

@sleepydragon @dealraker

 

i would say that the Bank of America analyst is a very good one. In fact he was an engineer on the F-15 program IIRC in another life time. I religiously listen to the weekend Aviation and Defense business podcast where he is participating and am looking forward for that episode in about 48 hours. 
 

that said, the analyst price target is of no significance to me, be it from him or another analyst. Whether up or down. What matters to me the thought behind it. And I think that really helps, shape my thinking.

 

At the end of the day what goes into one person private investor’s portfolio is incredibly unique to that one person and his/her circumstances. Whereas analysts upgrade/downgrade has more to do with relative performance versus benchmark. And better suited for professional money manager as inputs. 

I agree. this is quite an epic quality issue or manufacturing escape. There is of course more to the story than what  Greg Hayes is telling in the CC. Sonic is a fairly common method to find voids in solid parts. they talk about an orthogonal scan not picking up what happened there and they are now doing angle scan. the facility was in operation since 2015 which begs the question why it occurred starting in 2020 and not from the start.

 

Not knowing the details it sounds to me like they had a shadowing problem that would mask some areas (or perhaps something along the lines). I am sure some people in engineering and quality are going to be in hot water , but from my experience, it is often management that brushes of concerns from engineering because they think it's overkill or wastes time and resources.

 

In any case, I think there is some financial risk that the parts that share in the process and in principle share the cost of the recall and customer compensation will bark at P&W and demand that they take on a larger share, because this is solely their fault. That's what I would do, if I were in their shoes.

[Fundmanagerthrwawy]

2 hours ago, Xerxes said:

@sleepydragon @dealraker

 

i would say that the Bank of America analyst is a very good one. In fact he was an engineer on the F-15 program IIRC in another life time. I religiously listen to the weekend Aviation and Defense business podcast where he is participating and am looking forward for that episode in about 48 hours. 
 

that said, the analyst price target is of no significance to me, be it from him or another analyst. Whether up or down. What matters to me the thought behind it. And I think that really helps, shape my thinking.

 

At the end of the day what goes into one person private investor’s portfolio is incredibly unique to that one person and his/her circumstances. Whereas analysts upgrade/downgrade has more to do with relative performance versus benchmark. And better suited for professional money manager as inputs. 

What is the name of this analyst, Ronald Epstein perhaps?

*I’ve just seen the post above. 

Edited September 14, 2023 by Fundmanagerthrwawy

[Xerxes]

8 minutes ago, Fundmanagerthrwawy said:

What is the name of this analyst, Ronald Epstein perhaps?

*I’ve just seen the post above. 

yes. The one and the same. 
Dr. “Rocket” Epstein 

[Fundmanagerthrwawy]

20 minutes ago, Xerxes said:

yes. The one and the same. 
Dr. “Rocket” Epstein 

Yeah, I heard and seen his name thrown round a lot and always looked for him in my research.

[valueseek]

2 hours ago, Xerxes said:

@sleepydragon @dealraker

 

i would say that the Bank of America analyst is a very good one. In fact he was an engineer on the F-15 program IIRC in another life time. I religiously listen to the weekend Aviation and Defense business podcast where he is participating and am looking forward for that episode in about 48 hours. 
 

that said, the analyst price target is of no significance to me, be it from him or another analyst. Whether up or down. What matters to me the thought behind it. And I think that really helps, shape my thinking.

 

At the end of the day what goes into one person private investor’s portfolio is incredibly unique to that one person and his/her circumstances. Whereas analysts upgrade/downgrade has more to do with relative performance versus benchmark. And better suited for professional money manager as inputs. 

I agree, while there is definitely some bias from the house, majority of what the analysts do are more individually driven. Plus their modus operandi is to cater to the fast money hedge funds - majority of whose outlook is 3-6 months. Even big long only shops dont want to have a loser in their portfolio for 3-6 months, be it how much long term one says the institution is. If it is not an institution and more boutique shop or a small knit team on the long side, they can still bear 6months 1 year performance going into the stock but it is a very small number of people and not the ones primarily whom majority of the sell side analysts cater to.

[Spekulatius]

4 hours ago, valueseek said:

I agree, while there is definitely some bias from the house, majority of what the analysts do are more individually driven. Plus their modus operandi is to cater to the fast money hedge funds - majority of whose outlook is 3-6 months. Even big long only shops dont want to have a loser in their portfolio for 3-6 months, be it how much long term one says the institution is. If it is not an institution and more boutique shop or a small knit team on the long side, they can still bear 6months 1 year performance going into the stock but it is a very small number of people and not the ones primarily whom majority of the sell side analysts cater to.

No wonder so much just seems momentum driven.

[Cod Liver Oil]

LHX should get a good piece of the hypersonic business and add some tail to their book:

https://www.wsj.com/politics/national-security/hypersonic-missiles-america-military-behind-936a3128?mod=hp_lead_pos7

 

Edited September 15, 2023 by Cod Liver Oil

[dealraker]

One of the things I've done for years and years is simply buy the defense, rail, insurance broker, or whatever industry laggards, the ones that are discounted for whatever reason.  The outcome has been about 14%, maybe 14.5%, or simply way above what I'm shooting for in what was a very low inflation world and now one of somewhat higher.  For years I did this in the drug stocks but stopped that a long time ago.

 

As I mentioned above, it always-always-always to me seems that BOA (where I have accounts as I do Wells) is promoting whatever is blasting ahead in price action.  I may be wrong on this though, but it has registered that way to me.

 

Again, I'm not Parsad and seeking 19% is something I have never done and that sort of performance honestly makes me very uncomfortable.  I basically invest where I'm 99% certain over time I'm not going to lose and hope for some upside.  

 

Recently on another forum that I read because it was the only forum 25 plus years ago and I really enjoy forums, the crowd was blowing out of Berkshire to buy Dollar General.  The DG type stocks are precisely what I would never buy at any price at any time.  I consider whatever advantage or moat-no-competition sustainability they have to be completely temporary.  But they guys with DG, although they are down terrifically, are in my view nowhere near Parsad in skill....but they are seeking that big alpha outcome.  Ben Graham said, "The worst investor mistake is in late cyles to sell quality to buy lesser quality at chaper prices."  

 

Far-far-far away from my game.  Recently LHX at an average now of about $180 and NSC at $197 have my $ and vote.  I'd be happy and sleep well with 100% of my money there although LHX is less than 1% and NSC is about 2.5% of my total.  I'd not owned LHX but am delighted to be there now.  With LHX I'm buying as it descends; with NSC I have had the stock in 1976 and for the first time since then bought at $197.