SAFRY - Safran: Defense Tailwinds Increase Competitive Advantage Throwing Off ~$2Bn FCF
2024-07-16 16:42:36 ET
Summary
- Safran stock is up on industry tailwinds, exceptional economics, and reinvestment opportunities.
- The company has numerous compelling catalysts for growth including defense budget increases and civil aftermarket sales.
- The valuation debate hinges on FY'24–'26E sales growth exceeding 7% in my view.
Investment update
Following my last update on Safran ( OTCPK:SAFRF ) the stock is +15% excluding $2.37 dividends per share. In that note, titled "Industry Tailwinds Shifting Capital Productivity, FCF Higher, Rallying On Fundamentals", I outlined several factors behind the buy thesis:
- Attractive European play for global aerospace and defense industry positioning.
- Industry tailwinds - 1) US + world defense budget projections, 2) global military expenditure trends, 3) negative working capital from its current order book,
- Exceptional economics with recently higher turnover and at the margin, driving FCF for redistribution and growth of future earnings.
- Extensive reinvestment runway to redeploy such funds at an advantage (characterized as business returns >12%, the LT market averages).