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Checking in on Two Aerospace Picks

By Scott Chan on September 29, 2017

ViaSat (Nasdaq: VSAT) has completed the Critical Design Review (CDR) for its ViaSat-3 class spacecraft, and is ready to move to the building, integration and testing phase for the first two (of three) satellites to be deployed. The company will once again work with Boeing (NYSE: BA) to build the satellites.

ViaSat is designing and manufacturing the communications payload, the part of the satellite responsible for providing the core functionality (e.g., sending and receiving transmissions), while Boeing is building an all-electric propulsion satellite platform and will deliver a payload module structure to ViaSat to install and test the payload. Boeing will also supply the satellite spacecraft, the model 702. Think of ViaSat as creating the “brain” of the satellite, while Boeing creates the body.

The new class of ViaSat satellites, once launched, is expected to provide unprecedented capabilities in terms of service speed and flexibility. The first two satellites will cover the Americas, and the Europe, Middle East and Africa. The third satellite will cover the Asia Pacific region. Essentially, with its next-generation satellite system, ViaSat will cover the entire globe.

ViaSat’s retail satellite service has seen some erosion of the customer base, but government demand has been robust and its airplane Wi-fi service, albeit still a small part of the company, is the best available and growing fast.

The plans are laid for ViaSat to be the dominant global satellite provider. But due to the heavy investment in the satellites, ViaSat doesn’t expect cash flow to turn positive until 2022. ViaSat is simply not a stock that one could evaluate with traditional metrics. The company is a unique kind of animal, with high potential rewards and requires a lot of patience until financial figures will likely reach a steady uptrend. This is why the stock is rated “high risk.” (See the Portfolio Table on our website.)

ViaSat is no doubt a long-term play. Our reference guru for the stock, Seth Klarman, a long-time major shareholder, views ViaSat the same way.

Speaking of Boeing, another of our Brain Trust Profits picks also made news this week involving a Boeing product. AAR Corp (NYSE: AIR) reached a five-year deal with Air Canada (TSE: AC) to provide MRO (maintenance, repair, and operations) service to the airline’s fleet of 34 Boeing 767s at AAR’s Miami facility.

This deal follows on the heels of a separate deal with Air Canada. Less than two weeks ago, AAR signed a 10-year agreement to provide airframe maintenance at its (recently acquired) Trois-Rivières Airport (Québec) facility to Air Canada’s airbus fleet and a new five-year deal for Air Canada’s Embraer fleet. Overall, the agreements cover 125 aircrafts and the total value of the deals will be worth approximately C$500 million over the full term.

AAR’s fiscal year 2018 started with a good first quarter (ended August 2018) and we fully expect the aircraft servicer to post a solid year with revenue growth likely in the high single digits or low teens. Earnings per share could also grow in the high teens or better as the company incrementally improves margins and reduces the share count via share repurchase.

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