Boenning & Scattergood Equity Research on IS&S
INVESTMENT CONCLUSION — Based on recent research we have reason to believe that our F2008 revenue assumptions may be too aggressive. However, despite these findings, the recent orders from Eclipse and American Airlines have provided IS&S’s flat panel cockpit display with significant market recognition and the expected 757/767 commercial orders should provide additional positive momentum.
The market is beginning to realize the strong competitive advantages IS&S’s flat panel cockpit display holds over the competition and now appears to be willing to accept this product as a more than viable avionics upgrade or OEM solution.
The long term financial outlook for IS&S has greatly improved and the table is currently being set for a return to profitability, but we want to make certain we are not creating a state of heightened expectations and that investors exercise caution.
We believe the latest orders, including the expected commercial deals are largely baked in to the current stock price. But as the revenue run rates and margin structures associated with these programs materialize we may see potential upside to our current estimates and potentially see reason to lift numbers. We arrive at our $29 price target by applying a 35x multiple to our C2008 non-GAAP EPS estimate of $0.84.
Conversations with Eclipse Aviation and DayJet raise yellow flags.
Recent discussions with key personnel at DayJet — Eclipse’s largest customer accounting for 1,400 of the 2,400 plane backlog — lead us to believe DayJet will take delivery of Eclipse 500's at a slower than expected pace. DayJet anticipates taking delivery of 50 aircraft in C2007 and 150 in C2008. It expects to receive roughly 10 planes per month towards the end of C2007 into C2008.
Additionally, DayJet has financing of $100m which only covers the first 80 planes.
Finally, we should point out that DayJet has not yet proven the long term viability or earnings potential of its revolutionary air taxi model and we are unsure if it will ever be able to generate enough cash to take delivery of the full 1,400 plane order ($2.1b).
Recent discussions with key personnel at Eclispe lead us to believe that producing 400 planes in C2007 and 1,000 planes in C2008 may prove to be too aggressive.
Based on previously published data, it appears that CEO Vern Raburn has a propensity to over promise and under deliver, and while we appreciate his enthusiasm and lofty goals, we need to take a more realistic view of what Eclipse can accomplish over the next year. The company’s goal is to eventually manufacture four planes per day, but to date the company is still not even manufacturing one plane per day.
Furthermore, we learned that Eclipse would not manufacture all 2,400 planes in its backlog, rather it will take a more measured approach and gauge customer and market demand. We are now estimating that Eclipse will deliver 170 planes in C2007, 500 planes in C2008, and 700 planes in C2009. We believe Eclipse will make every effort to reach the 500 plane per year mark since that is its break-even point.