Aerospace Parts Company Valuations
The aerospace parts industry broadly experienced an improvement in investor sentiment following a lackluster 2020. Valuations increased over the first 6 months of 2021 as M&A activity picked up from relatively low levels in 2020 and consumer demand for air travel recovered. This article will examine some of the factors that appeared to impact aerospace parts company valuations in the public markets.
Important notes: This article examines potential driving factors for aerospace parts company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.
The industry constituents for this analysis are listed below. We focused on publicly-traded companies in the United States that produce aircraft systems, components, and parts. We selected companies traded on a major U.S. exchange with a stock price equivalent of $1 or more. The effective date of this analysis is June 30, 2021.
Figure 1 summarizes three items for the publicly-traded aerospace parts companies.
- Total median enterprise value (“TEV”)
- Median revenues
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”)
The latest fiscal year is notated “LFY” (2020), while the latest 12 months is labeled “LTM” (latest available information as of June 30, 2021).
As evidenced in Figure 1, historical trends in TEV, revenue, and EBITDA varied. The indexed median TEV has fluctuated over the most recent five fiscal years and the LTM. Underlying these oscillations are individual cases of inconsistent financial performance relative to enterprise values. For example:
- Astronics Corporation’s (ATRO) TEV declined from $1 billion in 2019 to $686 million as of June 30, 2021. This decline in valuation was fairly consistent with changes in its historical revenue and EBITDA.
- Triumph Group (TGI), experienced increases in its TEV from 2019 through June 30, 2021, despite despite generally declining revenue and EBITDA levels during these periods.
- Moog (MOG.A) exhibited “zig-zag” fluctuations in its TEV similar to those observed in Figure 1 from 2019 through June 30, 2021. However, revenue and EBITDA both declined between 2016 and 2019.
Valuations are often driven heavily by investor sentiment and expectations of the future. These factors likely play into the variations noted above. We will analyze the impact of financial metrics on valuations in the industry further. However, other factors, such as technological innovation, supply chain resilience, and diversity in product offering and customers can play a significant role given the rapid changes that occur in the industry. Gregg Profozich at California Manufacturing Technology Consulting (CMTC) recently authored an excellent summary of some technological changes expected in the industry.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Valuation multiples generally have increased over the last 5 fiscal years and into the first 6 months of 2021. Given the previously-discussed variations observed in TEV and financial metrics in Figure 1, trends in median multiples only tell us so much. Let’s dive into what is impacting valuations.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 4 and 5 below present a summary of the consensus forecasts for each group. Note that “NFY” means next fiscal year; NFY (blue line) = calendar 2021 for most companies, NFY (orange line) = calendar 2020 for most companies. “Current year” means June 30, 2021, while “prior year” means June 30, 2020.
In Figure 4, the orange line represents data as of June 30, 2020 – some of the worst months of the COVID-19 pandemic. At the time, the industry expected modest revenue declines in the NFY (2020) before resuming growth in 2021. EBITDA was forecasted to decline more sharply in the NFY. Actual results for 2020 outperformed these expectations. As the blue line (current data) demonstrates, the industry maintained its revenue and the EBITDA decline in 2020 was more muted than expected. The industry expects growth to accelerate in 2021 and 2022.
When plotting projected EBITDA growth against LTM EBITDA multiples, there appeared to be some correlation. Figure 6 presents this relationship.
Although we did not observe a clear linear relationship between growth and EBITDA multiples, companies with higher growth rates appeared to trade at higher valuation multiples. The clustering of multiples suggests that, while EBITDA growth influences valuations, investors are likely considering other factors in this industry.
We did not observe a meaningful relationship between revenue growth rates and revenue multiples.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.
Figure 7 presents a possible correlation between size (measured by market capitalization) and LTM revenue multiples.
The data in Figure 7 would suggest that larger companies tend to trade at higher valuation multiples. However, there are certainly inconsistencies in the observations. For example:
- RADA Electronic Industries Ltd. ranks among the smallest companies in the industry, but traded at one of the highest revenue multiples. Analysts expect RADA’s revenues and EBITDA to grow 61.3% and 50.0%, respectively, over the next three years. In this case, growth is likely a stronger influencer of valuation multiples.
- Mercury Systems, Innovative Solutions and Support, and HEICO all generated strong EBITDA margins in the LTM (see Figure 8 below). For these companies, investors appear to give greater consideration to profitability.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. This relationship appears to hold true for the aerospace parts industry, as shown in Figure 8 below.
There appears to be some correlation between LTM revenue multiples and LTM EBITDA margins. Again, there were inconsistencies in the data when measuring the relationship between these two factors.
Tying it All Together
The trends observed in this article suggest that growth, company size, and profitability all influence (to some degree) the valuations of publicly-traded aerospace parts companies. However, as was illustrated in this analysis, certain factors impacted companies more significantly than others. These variances highlight the complexities of how investors are valuing these companies in a highly competitive and constantly evolving industry.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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