WAIR - Wesco Aircraft

[mals]

Similar type business to aircraft parts is the oilfield parts/consumables distribution businesses of DNOW and MRC Global.  Essentially a duopoly kind of like WAIR and BE's spinoff.

 

I think there's less risk in that area that parts manufacturers will disintermediate.

 

rogermunibond, is DNOW really comparable to WAIR? My understanding of DNOW is that their supplier base is widely dispersed and buyers are well dispersed and often remotely located, and the buyer does not want to do its own inventory management in those remote locations.

WAIR on the other hand it appears has a risk emanating from somewhat concentrated supplier and buyer situation.

 

With your comparison of DNOW with WAIR, I wonder if I have overlooked something or misunderstood DNOW.

[100 Shares]

Long time CEO announced he will be retiring today. He has been CEO since 1977.

 

http://finance.yahoo.com/news/wesco-aircraft-announces-retirement-randy-130000335.html

[farbelow]

The business model seems to be working well and my first impression was that WAIR is reasonably priced. However, I find a lot of red flags:

1. Unstable management: Long-time CEO, Randy Snyder, announced to leave in Dec. CFO, Greg Hann, announced to leave in Nov. Hal Weinstein decided in Aug to retire at the end of 2014 and now has become interim-CEO.

2. Substantially lower gross margins (from 36% to 30%): this seems explainable due to growth and acquisition of Haas with a different business model, but still.

3. Their last 10-K mentions issues with their controls and procedures over accounting (is this the reason why the CFO has left?). The 10-k states that the accounting issues are limited to Haas. But WAIR has paid 560M for a company with earnings of 4.8M. Usually the resolution of accounting issue does not result in higher earnings. So, Haas had even lower earnings? Interestingly the last investor conference call after the 10-K did not have a single question about the accounting issues.

 

[handycap5]

jefferies just published a "survey" of aerospace distribution business. i found it interesting. some tidbits:

- amazon supply has entered the consumables sub-segment.

- 30% of respondents switched distributors in the last year.

- most contracts are 0.5-2.0 years.

- no clear pricing trend (some up, some down, some flat)

- most work with several distributors, no one works with only 1.

- BE and Wesco are large share players (many respondents have a relationship with one or both).

[jay21]

There was some very good commentary here. Thanks.

[AzCactus]

Just wow.  This position has to be a pain in Makaira's side. 

[Foreign Tuffett]

Just wow.  This position has to be a pain in Makaira's side.

 

Yeah, the incredulity from the Bank of America analyst was at a level that I've rarely seen from big bank analysts on earnings calls.

 

The "low single digits" industry organic sales growth forecast from the new CEO doesn't inspire much confidence.

[BRK7]

Wesco Aircraft was supposed to report after the close today.  At the last minute, the call was rescheduled for tomorrow am.

 

http://ir.wescoair.com/news-releases/news-release-details/wesco-aircraft-reschedules-fiscal-2019-third-quarter-earnings

 

Total speculation of course, but could it be related to the company putting itself up for sale?

 

https://www.reuters.com/article/us-wesco-air-hldg-m-a-exclusive/exclusive-wesco-aircraft-explores-options-that-include-sale-sources-idUSKCN1SY212

 

I guess we will find out tomorrow...

[handycap5]

You were right. Platinum equity for $11.05 a share.

[BRK7]

They've already got voting agreement in place covering 41% of the shares, and the merger is not subject to financing condition. Scheduled close in 4Q.

 

As I read the Proxy, it looks like there is a $39M fee in the event that the company terminates the deal to accept a superior proposal.  This is about 2% of deal value, so pretty typical, I believe.

[BRK7]

You were right. Platinum equity for $11.05 a share.

 

Shares have traded (very briefly) as high as $11.08 today, suggesting the possibility of a superior bid emerging.  Airbus?

 

Some simple math:

 

WAIR just reported ADJ EBITDA of $45.2M.  Because the company is growing @ top/bottom line (with possible acceleration due to restructuring initiatives), annualizing this figure should provide a conservative F12 ADJ EBITDA figure.

 

So, 4 x $45.2 = $180.8 in annualized EBITDA (again, likely conservative)

 

The present $1.9B buyout offer is therefore 10.5x this ADJ EBITDA figure.

 

For comparison, in May 2018, the aerospace business of WAIR’s competitor KLX was acquired by Boeing for 14.3x forward 2018 EBITDA.

 

I believe that KLX’s mix of business deserves a higher multiple, compared with WAIR.  That being said, WAIR’s business is seemingly improving and future EBITDA is likely understated, per my calcs above.

 

Does anyone have a view on the possibility of Airbus making a competing bid for WAIR? On the surface, Airbus seems a somewhat acquirer, given Boeing’s acquisition of KLX, the other large distributor. (KLX and WAIR are reported to together account for roundly 70% of the distribution market.)

 

Thoughts?

 

 

 

[vince]

You were right. Platinum equity for $11.05 a share.

 

Shares have traded (very briefly) as high as $11.08 today, suggesting the possibility of a superior bid emerging.  Airbus?

 

Some simple math:

 

WAIR just reported ADJ EBITDA of $45.2M.  Because the company is growing @ top/bottom line (with possible acceleration due to restructuring initiatives), annualizing this figure should provide a conservative F12 ADJ EBITDA figure.

 

So, 4 x $45.2 = $180.8 in annualized EBITDA (again, likely conservative)

 

The present $1.9B buyout offer is therefore 10.5x this ADJ EBITDA figure.

 

For comparison, in May 2018, the aerospace business of WAIR’s competitor KLX was acquired by Boeing for 14.3x forward 2018 EBITDA.

 

I believe that KLX’s mix of business deserves a higher multiple, compared with WAIR.  That being said, WAIR’s business is seemingly improving and future EBITDA is likely understated, per my calcs above.

 

Does anyone have a view on the possibility of Airbus making a competing bid for WAIR? On the surface, Airbus seems a somewhat acquirer, given Boeing’s acquisition of KLX, the other large distributor. (KLX and WAIR are reported to together account for roundly 70% of the distribution market.)

 

Thoughts?

 

I think there are more issues going on with this business than mgmt lets on.  It's been years of struggling, with multiple mgmt teams trying to improve performance.  About a year ago, one frustrated investor, after seeing that mgmt was hiring a firm to help them improve operations, asked mgmt what in the world was so difficult in turning this business around and instead of paying millions of dollars for consultation, something that mgmt was already being paid for, that they should put it into someone else's hands that are capable.  The CEO replied that if they couldn't realize the potential that a sale would be possible.  And they are clearly selling the business for a low price, especially relative to potential earning power, which is significantly higher than current earnings, like you said.  Unreal!!

[Spekulatius]

It’s probably not that easy to improve performance of this business. Boeing now has their own wholesaler KLX, why would they need WAIR at all. high customer concentration also dozens Bode well for pricing power, They can’t make money in the largest aircraft building boom ever, what makes you think they could change that? To me, the price looks quite fair, considering the low quality of the business..

[vince]

It’s probably not that easy to improve performance of this business. Boeing now has their own wholesaler KLX, why would they need WAIR at all. high customer concentration also dozens Bode well for pricing power, They can’t make money in the largest aircraft building boom ever, what makes you think they could change that? To me, the price looks quite fair, considering the low quality of the business..

 

The thing that makes me think they are underperforming their potential is to look at their history.  We obviously have different opinions of their business, and I could not disagree more with your assessment of "low quality business".  Yes it looks low quality for the last 4-5 years, but if you take the time to really understand what they do and the value they provide while simultaneously making good profit you would see a fantastic moat that they ALMOST couldn't destroy even with a few bad years of mismanagement.  You would also see that even when one of your major clients tries to limit your market power (Boeing), they couldn't.  You can't just start a business and compete with them, even with lots of capital, as it takes forever to build the business that they have built.  And it's very complicated.  However, I will admit that I don't understand what changed (I know enough that it wasn't Boeing and definitely looks more like operational issues rather than competitive) but I have a strong feeling that it was their acquisition of the chemicals business because their problems started shortly after that.  Probably was much more complicated to integrate that acquisition and trying to combine the businesses and realize the synergies when they probably suspected, based on their history in the business, that it was going to be difficult.  It really is a fascinating business and simply explaining it away as a low quality business, I think completely misunderstands the story.

[vince]

It’s probably not that easy to improve performance of this business. Boeing now has their own wholesaler KLX, why would they need WAIR at all. high customer concentration also dozens Bode well for pricing power, They can’t make money in the largest aircraft building boom ever, what makes you think they could change that? To me, the price looks quite fair, considering the low quality of the business..

 

The thing that makes me think they are underperforming their potential is to look at their history.  We obviously have different opinions of their business, and I could not disagree more with your assessment of "low quality business".  Yes it looks low quality for the last 4-5 years, but if you take the time to really understand what they do and the value they provide while simultaneously making good profit you would see a fantastic moat that they ALMOST couldn't destroy even with a few bad years of mismanagement.  You would also see that even when one of your major clients tries to limit your market power (Boeing), they couldn't.  You can't just start a business and compete with them, even with lots of capital, as it takes forever to build the business that they have built.  And it's very complicated.  However, I will admit that I don't understand what changed (I know enough that it wasn't Boeing and definitely looks more like operational issues rather than competitive) but I have a strong feeling that it was their acquisition of the chemicals business because their problems started shortly after that.  Probably was much more complicated to integrate that acquisition and trying to combine the businesses and realize the synergies when they probably suspected, based on their history in the business, that it was going to be difficult.  It really is a fascinating business and simply explaining it away as a low quality business, I think completely misunderstands the story.

 

One more thing....when you say "why Boeing would need them at all" is an interesting statement.  And that really does prove how resilient their business is.  Did you know that revenues went up every year right through this rough patch where there service performance was horendous? And if I remember correctly their sales increased right thru the GFC.  Not many low quality companies can have their sales increase when one of their biggest clients tries to shut them out AND they are executing poorly at the same time.  Their sales performance supports my belief that their problems were executing operationally.  And it doesn't surprise me.  What surprises me is how long it is taking to right the ship

[Spekulatius]

Yes, their revenues have been rising. Now is this because their business is indispensable or is it because Boring and Airbus let them live? I think it is the latter, because Boring went capital light years ago and outsourced parts the business as extended work benches for low margin work. I think WAIR distribution is just that, aerostructures is another example of low margin high working capital business, that the big guys like to outsource, because it allows them to increase their return on assets.

[vince]

Yes, their revenues have been rising. Now is this because their business is indispensable or is it because Boring and Airbus let them live? I think it is the latter, because Boring went capital light years ago and outsourced parts the business as extended work benches for low margin work. I think WAIR distribution is just that, aerostructures is another example of low margin high working capital business, that the big guys like to outsource, because it allows them to increase their return on assets.

 

I dont necessarily disagree with your statement that Boeing liked to outsource this but that in itself does not mean it's a low quality business.  And the fact that Boeing can outsource these functions to earn higher returns while at the same time have Wair earn attractive returns is precisely what makes them resilient.  Remember also that Wair has some 7,000 customers, none accounting for more than 10% of revenues so their livelihood is not dependent on Boeing "letting them live". I don't want to make offensive assumptions but it is pretty clear that you have never really took the time to understand their history, or exactly what they do and the value they provide even after their tidy profit.  I mean the fact that Boeing tried to recapture some of the business, and the fact that Wairs sales continued climbing is pretty compelling.  The problems at Wair were not sales, or prices, or competition, it was their inability to run their complicated operations with the same efficiency with which they successfully built the business for 65 years.  And I can name a few WILDLY successful businesses that do what they do, but in less attractive industries.  It's also possible that something has changed that has made the business lower quality that I'm not seeing but I have seen no proof of that after keeping my eyes and ears open for a few years.