Does Rockwell Collins Have Anything To Fear From Boeing's New Avionics Unit?

An internal Boeing Co BA announcement, reported by the press, suggested that the company is setting up an inhouse unit called Boeing Avionics. The step is seen as a move by Boeing to wean it from extensive outsourcing.

Avionics is the electronic systems used on aircraft that help in communications, navigation, display and management of multiple systems.

Avionics companies reacted with a move to a downside on Monday, with shares of Rockwell Collins, Inc. COL shedding over 6 percent.

No Near-Term Impact Likely

Looking at the impact of Boeing's announcement, Canaccord Genuity said it believes Rockwell Collins is relatively well positioned in its markets through ownership of its IP, and very strong reputation with both Boeing and AIRBUS SE UNSPON ADR EA REPR 0.25 ORD EADSY as a top-performing supplier.

The firm doesn't believe Boeing's changed stance concerning its avionics supply chain will impact Rockwell Collins in the next five years. The firm added that it sees little risk to the business before the introduction of the next generation 797 NMA, or a 737 replacement.

Analyst Ken Herbert, however, feels at the barest minimum, legacy avionics suppliers could face price pressure from Boeing's move. The analyst sees this as posing long-term risk.

See also: Analyst Sees 10-25% Upside In Aero Stocks

Canaccord Genuity estimates that the company's commercial transportation business would grow 9 percent through 2020, as the increased shipset content on the MAX, A350 and 777X accelerate growth. The firm also thinks government systems growth will accelerate in 2018, while it expects that the business jet market has troughed.

The firm suggested that its confidence in the opportunity was reinforced by the company's strong results reported last week, with the company reporting forecast-bearing adjusted earnings per share and strong organic revenue growth. While leaving the adjusted earnings per share and free cash flow guidance for 2017 unchanged, the firm noted that the company raised its revenue guidance.

Stock Set Up Well

Canaccord Genuity said Rockwell Collins stock is set up well for accelerated growth in 2018 across its portfolio. Additionally, the firm sees the anticipated free cash flow improvement and synergy opportunities arising out of the B/E Aerospace Inc acquisition as positives.

Meanwhile, the firm indicated that the IMS business, although taking a few years, has begun to deliver the type of results the company had anticipated when it completed the deal.

As such, Canaccord Genuity upgraded shares of Rockwell Collins from Hold to Buy and lifted its price target for the shares from $108 to $125.

"We like COL for the expected FCF improvement, potential upside in many of its end markets, and opportunity to exceed the BEAV cost and revenue synergy targets in FY18-FY20," the firm concluded.

At the time of writing, Rockwell Collins shares were rebounding by 3.37 percent to $110.12.