Undervalued No More

 | May 05, 2014 | 6:45 AM EDT  | Comments
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Stock quotes in this article:

beav

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utx

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ge

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hon

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col

They just keep happening, yet we're not focusing on them. We keep focusing on everything else -- Ukraine, Chinese Industrial numbers, interest-rate declines in U.S. Treasuries, stimulus-tapering by the Fed.

But we aren't paying attention to this massive wave of buyouts, break-ups and mergers -- and today it is B/E Aerospace's (BEAV) turn to walk down the aisle.

B/E Aerospace is a company that has managed to integrate itself into so many parts of all planes -- commercial and business jets -- that it's got a huge chunk of pretty much every plane. Yesterday, this company canceled a scheduled analyst meeting and instead issued a release stating that it has decided to explore all alternatives, including a takeover.

This $9 billion company would be a natural fit for United Technologies (UTX) after United Tech's $16.5 billion buy of landing-gear outfit Goodrich in late 2011. It could work well for General Electric (GE), but that company's probably got too much on its plate. I would say Honeywell (HON), except Honeywell sold a fastener distributor to B/E six years ago and I can't image that it wants to buy the company back. I can understand, though, why Honeywell would want to own all the instrumentation upfront, as well as the seating, lighting and galley portions of the plane. It did just sell 1.5 million shares of B/E that it received as part of the consideration for the sold fastener division and, otherwise, it retains 1.9 million shares.

I also imagine that Rockwell Collins (COL) will kick the tires in a possible merger of equals. Rockwell is a $10 billion company that has a huge piece of many planes, although its business is weighted to the electronics portion of aerospace.

Of course, private equity could buy B/E, although the stock is hardly cheap, selling at 23x earnings. These days, seeing as these firms have cashed out of a lot of positions of late, they are indeed flush enough to make it happen.

We have lots of areas in the economy where we know there is intermittent strength. We debate these every day, especially given the backdrop of such low interest rates and with the weather playing havoc with so many parts of the economy that we can't be sure what's weak, and what's merely weak because of the weather. We know that Ukraine and China woes have held back all stocks, regardless of where the associated companies are located or what they do. 

But no one has questioned the aerospace cycle. All shapes and sizes of fuel-efficient planes are in demand. That means B/E has a huge backlog of orders for its equipment. I have no doubt that a transaction could get one.

What matters to me, speaking in broader terms, is this: Here is still one more medium- to large-capitalization company with a stock that, after a great run for two-thirds of 2013, has now done nothing for six months. I am sure there are many people who think, "Why is it a given that a company's stock should go higher?" But consider the strength of B/E's business. Given this, I think management is frustrated by the stock doing nothing for this period, and that this is looked upon with intense interest by those big companies in aerospace who recognize that United Technologies has been able to continue to raise estimates off the synergies from its own deal.

In other words, the public market has undervalued B/E Aerospace -- that is, until today.

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