Aerospace Parts Company Valuations – June 2023
Following an increase in valuations in 2021, enterprise values for publicly-traded aerospace parts companies declined through the end of 2022. Valuations of these companies were flat overall. However, as will be discussed in this update, changes in valuations between December 2022 and June 2023 varied wildly by industry constituent. We will further examine some factors that appeared to have impacted valuations.
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. The effective date of this analysis is June 30, 2023.
Figure 1 summarizes three items for the aerospace parts companies:
- Total enterprise value calculated as the sum of market capitalization and interest-bearing debt less cash;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is notated “LFY” (calendar 2022), while the latest 12-month period is labeled “LTM” (latest available information as of June 30, 2023).
Valuations generally increased through 2021, retracted in 2022, and were marginally higher (on average) through June 30, 2023. In the LTM, revenue and EBITDA increased slightly, with valuations following suit. In digging deeper into the data, we noticed that certain companies saw large improvements in valuations (TransDigm Group, Astronics, and Moog saw increases in enterprise values of 40% or more). Other companies’ valuations declined, including Northrop Grumman, Mercury Systems, and Innovative Solutions and Support (15% or more in deteriorated enterprise value).
According to KPMG in its Aerospace & Defense M&A 2023 report, the aerospace experienced significant turmoil over the last several years. The industry has been impacted by reduced demand during the pandemic, then parts and raw materials availability due to supply chain issues, inflation, and disruptions caused by the Russian-Ukrainian war. Most recently, supply constraints and labor shortages have impacted growth, while the general inability to pass the impact of inflation on to customers have impacted margins.
M&A activity declined nearly 20% from 2019 to 2020. While M&A activity rebounded in 2021, transaction volume again declined in 2022 due to rising interest rates and greater degrees of economic uncertainties. According to KPMG’s data, valuations were highest among high-tech and high-growth subsegments of the industry.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Median valuation multiples fluctuated over the last five fiscal years and the LTM period. While the median revenue multiple declined in June 2023, the median EBITDA multiple remained stable. Next, we will examine what may be impacting the magnitude of the valuation multiples.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 4 and 5 below present a summary of the industry’s historical performance and consensus forecasts. Note that “NFY” means next fiscal year; NFY (blue line) = calendar 2023 for most companies, NFY (orange line) = calendar 2022 for most companies. “Current year” means data effective as of June 2023, while “prior year” means June 2022.
In Figure 4, the orange line represents data as of June 2022, while the blue line represents current data. Revenue growth expectations as of June 2023 are generally lower than those of the prior year. EBITDA growth remained consistent between June 2022 and 2023.
We looked to identify a meaningful correlation between growth and observed valuation multiples. Companies that generate high levels of growth often trade at higher multiples than their lower growth counterparts. LTM revenue and EBITDA multiples are plotted against projected 2-year revenue and EBITDA growth rates, respectively, in Figures 6 and 7.
We did not observe a strong relationship between growth and valuation multiples. However, there was some clustering of higher growth companies (HEICO and TransDigm) at higher valuation multiples. Revenue multiples varied widely for companies with growth rates of 2% to 7%. Two companies (Spirit AeroSystems and Astronics were expected to generate the strongest revenue growth rates, but traded at some of the lowest revenue multiples. As will be seen later in this article, these companies also generated the lowest EBITDA margins of the group overall.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
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 8 presents a possible correlation between size (measured by market capitalization) and LTM EBITDA multiples.
The data in Figure 8 suggests that larger companies trade at higher valuation multiples. However, we noted significant dispersion in the valuation multiples of the smallest companies (less than $5 billion in market capitalization). For example, Innovative Solutions and Support, Inc. ranks among the smallest companies in the industry but trades at one of the highest EBITDA multiples.
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 for the aerospace parts industry, as shown in Figure 9 below.
There appears to be some correlation between NFY revenue multiples and NFY EBITDA margins, suggesting that more profitable companies trade at higher revenue multiples. As was noted previously, Spirit AeroSystems and Astronics are expected to generate the lowest EBITDA margins and consequently trade at the lowest revenue multiples.
The Leverage Story
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. Figure 10 plots LTM revenue multiples against their associated debt-to-total capital ratios (as available).
In Figure 10, companies with the highest leverage ratios tended to trade at the lowest revenue multiples. We noted, however, the significant dispersion of revenue multiples for companies with debt-to-total capital ratios of approximately 20% or less.
Tying it All Together
The trends observed in this article suggest that growth, company size, profitability, and leverage all influence (to some degree) public aerospace parts company valuations. However, as was illustrated in this analysis, no one factor appeared to have a dominating impact on the magnitude of valuation multiples. These variances highlight the complexities of how investors are valuing these companies in a highly competitive and constantly evolving industry.
A summary of these observations is presented below and compared to our June 2022 analysis.
In our June 2022 analysis, growth was found to have a stronger overall impact on the magnitude of valuation multiples. More currently, it appears that other factors, such as profitability, size, and the degree of financial leverage, have a stronger influence over valuations within the 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.