12 Aug

Swing Tip: B/E Aerospace – NYSE:BEAV


B/E Aerospace is the world’s leading manufacturer of aircraft cabin interior products. B/E Aerospace designs, develops and manufactures a broad range of products for both commercial aircraft and business jets.

This tip is best executed using the well known income strategy using options namely the “covered call”. The covered call exists in having the outright stock and selling some out of the money calls against it to lower the cost basis. If the calls expire worthless, new calls are sold against them to lower the basis again and this process repeats itself until the calls are in the money. At that time the shares are sold and the calls are bought back at the same time just before expiration (to avoid the assignment fees). More detailed information can be found online and a basic introduction can be seen at https://www.youtube.com/watch?v=RORX9vVRoP8

This strategy works bests with a solid growth company: a positive trend combined with the potential to grow steadily further but is not likely to jump up and down on the short term (volatility). These companies attract long term investors especially if they give a dividend. Such a company is B/E Aerospace.

In the recent second quarter earnings call at end of July, http://seekingalpha.com/article/3991500-b-e-aerospace-inc-2016-q2-results-earnings-call-slides , revenues were + 7%, operating margin +18.1% and EPS +12%. They have an active share buyback program running (bought for $150M during Q1 and Q2) and an annual dividend yield of 1.74%. Their P/E ratio is only 16.32, which is low compared to some of its competitors e.g. NYSE:UTX 24.44.

All fundamentals are looking healthy and especially their outlook. Their total backlog of orders (slide 2) is currently $8900M. This is a very good filled order book considering that in Q2 their revenue was $755M. This would take them more than 11 quarters (if there are no cancellations) to fulfill, that’s almost 3 years!

The strategy: on August 11th, when they have their ex-dividend date, a small price correction will happen on that day. The play is to buy the shares on the dip on the 11th or the days after. Optionally, regular October calls can be sold against it with strike price 50 for around 0.9

We look for a price run-up into their Q3 earnings on Oct 25th which is just after the expiration of the call options.


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