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How KLX Inc. compares to its peers

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Updated

Farallon disclosed stake in KLX Inc.

In previous parts of this series, we learned that Farallon Capital disclosed 7% stake in KLX Inc. (KLXI) in its 13G filing. KLXI started trading on NASDAQ a month ago, after its spin-off from parent company B/E Aerospace Inc. (BEAV). In previous parts of this series, we discussed BEAV, its spin-off of KLX, and a business overview of KLX Inc. and its strengths. We also explored an industry overview of KLX’s operating segments.

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KLX’s financial performance

As of September 30, 2014, KLX generated pro forma last 12 months (or LTM) revenue of $1.7 billion. Its adjusted earnings before interest, tax, depreciation, and amortization (or EBITDA) was $398 million. The adjusted EBITDA margin was 23.2%.

At the time of separation from its parent company B/E Aerospace Inc. (BEAV), KLX’s debt to LTM adjusted EBITDA was 3.0x. KLX expects tax goodwill of $1.2 billion to provide cash tax savings of $254–$277 million for the next 15 years. This should increase annual cash flow by $37 million in the first nine years and $11 million thereafter for six years.

Valuing KLX against its peers

We’ll value KLX Inc. against its peers Heico Corporation (HEI), Triumph Group (TGI), AAR Corp. (AIR), and Textron (TXT).

KLXI’s EV/EBITDA (or enterprise value to earnings before interest, tax, depreciation, and amortization) is lowest among all its peers. KLX’s forward P/E ratio is lower than majority of its peers.

Analyst views on KLX

Deutsche Bank initiated coverage on KLX Inc. with a “hold” rating on December 19, 2014. The target price was set at $48. Deutsche analysts note, “The company’s exposure to increasing aircraft production rates and aerospace aftermarket are attractive, KLX’s recent expansion into the oil and gas market (especially given current backdrop) gives us pause and our estimates remain well under the initial management guidance. EV/EBITDA valuation warrants attention but given the lack of clarity in the energy market, we’ll remain on the sidelines.” Earlier this year, Deutsche Bank lowered its price target on the stock to $46.00 from $48.00 with a “hold” rating.

RBC Capital initiated coverage with a “sector perform” rating. KeyCorp upgraded the stock to “buy” from “hold.” On January 15, Jefferies initiated coverage on KLX Inc. with a “hold” rating and a price target of $44.00. On January 15, KeyBanc upgraded KLX from “hold” to “buy” with a target of $50.

To read more on this industry, please explore Market Realist’s Aerospace and Defense industry page.

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