KLX Buy Supplements Boeing’s 'Organic' BGS Strategy

Deal pushes projected annual BGS earnings to $16.8 billion.

Printed headline: Boeing's Parts Play

 

Boeing’s planned purchase of parts distributor KLX’s aerospace business is a complementary addition to its Boeing Global Services (BGS) unit and signals that BGS’s organic-growth-first strategy will be supplemented through acquisitions as part of meeting lofty revenue growth targets.

The $4.3 billion deal, expected to close this year, gives Boeing a well-respected provider of fasteners, chemicals, and logistics services to fold into its Aviall brand. KLX’s remaining business, which focuses on the energy market, will be spun off as part of the deal. KLX was spun out of B/E Aerospace in 2014.

Boeing sees $70 million in annual synergies by 2021, and the deal adds a projected $1.5 billion—or 10%—to BGS’s 2018 bottom line, pushing Boeing’s aftermarket-focused business unit up from $15.3 billion to $16.8 billion. Pre-tax earnings would climb from $2.4 billion to $2.7 billion, Canaccord Genuity analyst Ken Herbert notes. 

“While Boeing has not reported any changes to its 2018 outlook and/or financial strategies/commitments, we view this acquisition as incrementally positive for [its] BGS segment,” Herbert writes in an analyst note.

While touted as an aftermarket-focused buy, nearly half of KLX’s aerospace revenue is generated by sales to OEMs. About 40% is true aftermarket business. Such balance aligns with Boeing’s goals of smoothing out cyclicality, as the MRO business, while somewhat cyclical, generates consistent demand so long as aircraft are operating, while new-production activity has greater variability. 

The deal provides a boost to BGS on its journey to grow to about $50 billion in annual revenues in a decade or so—equivalent to growth of about 230%. Boeing executives have been adamant that organic expansion—expanding everything from data-driven digital services to spare-parts sales—will be the primary driver. BGS grew 5% in 2017 compared to year-earlier figures and was up 8% in the first quarter this year. The company’s goal is to outpace growth in the aftermarket as a whole, which Boeing pegs at a 3.5% annual growth rate.

While Boeing has not said BGS-centric acquisitions are off the table, executives have consistently emphasized organic growth as the primary strategy. Many analysts have questioned this path, suspecting that the $50 billion annual revenue target will only be achieved by mixing in multiple important acquisitions. 

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