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A View From Wall StreetHeidi Wood, Managing Director, Morgan Stanley Research

M O R G A N S T A N L E Y R E S E A R C HNorth America

Morgan Stanley & Co LLC

Heidi [email protected]+1 (1)212 761 4407

October 2012

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

Source: Company documents

http://www.gulfstream.com/cf/pressroom/images/delivery.cfm?imgid=gulfstream_g300.jpg&action=agree

M O R G A N S T A N L E Y R E S E A R C H

2

October, 2012

Heidi Wood, (212) 761-4407, [email protected]

Summary

1. A View From Wall Street

• Aerospace/Defense Stock Performance Snapshot

• MS Economics – Where do we stand in the recovery?

1. Key Areas of Debate in Commercial Aerospace

• Are we ordered out?

• What are the risks to production?

• Sizing up the new entrants

1. Key Areas of Debate in Business Jets

• When is the cyclical upturn?

• Who are the potential winners / losers?

1. Key Areas of Debate in Defense

• What is the impact of sequestration?

• Who are the relative winners / losers?


3

October, 2012


Commercial Aero has Been a Great Performer Over Time

Annual Price Performance2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Aerospace Average 13% (21%) (7%) 43% 18% 22% 21% 19% (49%) 53% 16% 8%Defense Average 53% 26% 6% 1% 20% 9% 22% 23% (28%) 9% (8%) (5%)S&P 500 (10%) (13%) (23%) 26% 9% 3% 14% 4% (38%) 23% 13% (0%)

1% 0%4%

8%

26%

1% 2%6%

15%

33%

0%3%

6%

15%

29%

0%

5%

10%

15%

20%

25%

30%

35%

1 Wk. 1 Mo. 3 Mo. YTD 1 Yr.

Aerospace Defense S&P

US Companies’ Price Performance – Weighted Average Performance vs. S&P500


4

October, 2012


YTD Performance

Source: Morgan Stanley Research, Thomson Reuters

39%37%

15% 14% 13%10% 8% 7%

4% 4% 3%1%

48%

-9%-5%

-3%-2%

15%15%16%

-1%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

TD

G

TX

T

HII

NO

C

LMT

SP

X_I

DX

Med

ian

De

f

LLL

RT

N

BE

AV

SP

R

UT

X

Med

ian

Aer

o

ER

J

GR

GD

PC

P

WA

IR

CO

L

BA

AT

K

YTD Stock Price Performance


5

October, 2012


Our Economics Team Expects a Modest slowdown in ‘12

Source: Morgan Stanley Research


6

October, 2012


Commercial Aerospace


7

October, 2012


Summary

1. Long-lived Mainline Commercial Aerospace Up Cycle

• Visibility is high

• Backlog, particularly near-term slots, are secure

• Risk of shortages in supply base

1. 2012 is looking to be a banner year for orders, which tend to accelerate ahead of plane introductions

2. Mainline aerospace faces oligopoly dynamics – pulls investments forward to protect customers from defecting – CSeries, C919.

3. Biggest disconnect - Supplier lead-times have been slow to extend


8

October, 2012


The Perfect Storm Beginning to Brew in Aerospace

We expect deliveries for all four key aerospace sub-segment to accelerate through 2015

-

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Comm Aerospace+9% CAGR

Helicopters+6% CAGR

Biz Jets +12% CAGR

Regional Jets +8% CAGR

Historical and Projected Aerospace Deliveries by Market


9

October, 2012


We’re in the Middle Innings of the Up-Cycle with a Peak Likely in 2015

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

Large CommercialBoeing707 - - - - - - - - - - - - - - - - 717 32 49 20 12 12 13 5 - - - - - - - - - 727 - - - - - - - - - - - - - - - - 737 282 299 223 173 202 212 302 330 290 372 376 372 420 445 505 505 747 25 31 27 19 15 13 14 16 14 8 - 9 30 24 24 24 757 45 45 29 14 11 2 - - - - - - - - - - 767 44 40 35 24 9 10 12 12 10 13 12 20 24 24 22 22 777 55 61 47 39 36 40 65 83 61 88 74 73 84 100 100 100 787 - - - - - - - - - - - 3 45 100 117 120 Legacy Boeing 483 525 381 281 285 290 398 441 375 481 462 477 603 693 768 771

Legacy McDonnell Douglas 9 2 - - - - - - - - - - - - - -

Total Boeing 492 527 381 281 285 290 398 441 375 481 462 477 603 693 768 771

% Change Y/Y (21%) 7% (28%) (26%) 1% 2% 37% 11% (15%) 28% (4%) 3% 26% 15% 11% 0%

AirbusA300 8 11 9 8 12 9 9 6 - - - - - - - - A310 - - - - - - - - - - - - - - - - A320 Family 241 257 236 233 233 289 339 367 386 402 401 421 464 484 484 484 A330 43 35 42 31 47 56 62 68 72 76 87 87 90 102 112 112 A340 19 22 16 33 28 24 24 11 13 10 4 - 5 4 2 2 A350 - - - - - - - - - - - - - - - 25 A380 - - - - - - - 1 12 10 18 26 25 30 30 30 Total Airbus 311 325 303 305 320 378 434 453 483 498 510 534 584 620 628 653

% Change Y/Y 6% 5% (7%) 1% 5% 18% 15% 4% 7% 3% 2% 5% 9% 6% 1% 4%

Total BA / Airbus 803 852 684 586 605 668 832 894 858 979 972 1,011 1,187 1,313 1,396 1,424

% Change Y/Y (12%) 6% (20%) (14%) 3% 10% 25% 7% (4%) 14% (1%) 4% 17% 11% 6% 2%

Large Aircraft Deliveries (Boeing and Airbus) 2000 to 2015E


10

October, 2012


Visibility on Production Are Near All-Time Highs

0

2000

4000

6000

8000

10000

90 94 98 02 06 10

Un

its

0

2

4

6

8

10

Bac

klo

g i

n Y

ears

Backlog Backlog/Delivs


• OEMs need to burn down their backlog to address excess demand

• Great amount of traveled work compared to the last cycle means OEMs need to be more vigilant about their supply base


11

October, 2012


We Think Backlogs are Fairly Secure


Replacement Growth

Speculative Growth

Total Passenger Replacement Growth

Speculative Growth Total

Boeing737 991 972 402 2,365 42% 41% 17% 100%747 55 33 9 97 57% 34% 9% 100%767 54 5 13 72 75% 7% 18% 100%777 132 217 31 380 35% 57% 8% 100%787 362 389 106 857 42% 45% 12% 100%Total 1,594 1,616 561 3,771 42% 43% 15% 100%

AirbusA320 Family 483 1,717 1,107 3,307 15% 52% 33% 100%A330 105 196 50 351 30% 56% 14% 100%A340 - - 2 2 0% 0% 100% 100%A350 191 328 48 567 34% 58% 8% 100%A380 59 112 5 176 34% 64% 3% 100%Total 838 2,353 1,212 4,403 19% 53% 28% 100%

Grand Total 2,432 3,969 1,773 8,174 30% 49% 22% 100%

• Both Airbus and Boeing have oversold delivery slots for the next two years

• The majority of the backlog is for replacement or reasonable growth. Just 22% is what we deem to be speculative growth (e.g., Kingfisher)


12

October, 2012


… Persistently High Fuel Costs Makes New Planes More Compelling

Fuel as % Total Operating Expense

5%

15%

25%

35%

1972 1977 1982 1987 1992 1997 2002 2007

No urgency to replace a/c here

Fuel Cost ¢/Gallon - Inflation AdjustedAs of Dec.2010

-

75

150

225

300

375

1978

1982

1986

1990

1994

1998

2002

2006

2010

Co

st p

er

gal

lon

(¢

)

-60%

-40%

-20%

0%

20%

40%

60%

Yo

Y ch

ang

e

Total cost ¢ / gallon / 2010 US$ YoY change

• Persistently high fuel costs has been a major tailwind for demand

• Continuing threats in the Middle East reasonably assures that elevated oil prices are here to stay

• Volatility could be a near-term risk to airline profitability given lag to pass pricing on to consumers


13

October, 2012


Orders Historically Spike with Introduction of New Planes

0

200

400

600

800

1000

1200

1400

1600

1800

1996 1998 2000 2002 2004 2006 2008 2010

Boeing

Airbus

Boeing and Airbus Gross Orders(1996 - 2011) Order peaks

coincide with plane launches..

…we expect 737Max launch in late '11 to drive '12 orders for BA


14

October, 2012


Recent Acceleration in Deliveries Have Been Easily Absorbed

Source: Company documents, Ascend, Morgan Stanley

Historical Deliveries as a Percentage of Total Active Fleet

-

200

400

600

800

1,000

1,200

1,400

1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

0%

5%

10%

15%

20%

25%

30%Total Deliveries Total Delivs as % of Total Fleet

Big cycle swings

Longer more moderate cycles


15

October, 2012


Future Of LCCs/Lessors Complicates Product Strategy

More Food for Thought:

Who are the future customers? -- LCC model is slowing in North America and Europe, Asian LCC markets not fully developed. What are the implications for future aircraft design?

Product strategy challenge for the OE’s -- Lessors don’t always share the same desires and agendas as airlines. Airlines

• Lessors decried the A320NEO and EADS launched it anyways• Lessors comprise 1/3 of the world’s aircraft but are projected to be 50% in the

future

Changing competitive dynamics (A320NEO,737Max, new RJ entrants and emergence of China this decade) suggest potential for shorter lives for commercial aircraft AND even more so engines.

• What does this mean from a product strategy point of view• How disruptive could this be for engine OE’s where the business model depends

on breakeven/losses on the new and presumption of long lived aftermarket


16

October, 2012


Aircraft Leasing is Playing a Larger Role – Mitigating Risk to Deliveries

Source: Boeing


17

October, 2012


We’re Still Watchful for New Aircraft Entrants


C Series ARJ

(SA -CRJ/2)

Sukhoi RJ

(SA-RRJ/2)MRJ

(SA-MRJ)/2

E190-stretch?

New plane?

Chinese 130 -150 pax plane 2020?

Indian RJ?

C- Series Chinese

COMAC ARJ121-

RussianSukhoi RJ

-Japanese

MRJ

-Embraer195X(?)

Chinese 130 - 150-pax plane 2020?

New Formula for Single Aisle Competition: Japan / Russia / ChinaNow - Duopoly Future - Split 3 Ways At a Minimum

(BA/Airbus) (BA / Airbus / New Indigenous Competitor)

DV916641


18

October, 2012


0

100

200

300

400

500

600

2 3 4 5 6 7 8 9 10

Range ( '000 nm)

Sea

tin

g C

apac

ity*

A320

A319

A321

A330-300

787-8

A350-900

747-8

A380

*Based on manufacturer's standard configuration

737-700

777-300ER

777-200ER

737-800

737-900ER

787-3

787-9

A318

A330-200

A340-600

A350-800

A350-1000

777-200LR

Black= Airbus Blue= Boeing Grey= Dying Aircraft

767-400ER

767-300ER

A340-500

Embraer

New Entrants

Sukhoi Superjet 100 (EIS - 2011)

Comac ARJ 21 (Curr. flight testing)

Bombardier Cseries (EIS - 2013)

Mitsubishi RJ (EIS - 2014)

Comac C919 (EIS - 2016)

Sharper Competitive Dynamics Ahead For Commercial Aerospace

Boeing / Airbus Duopoly

Emerging Narrowbody Competition


19

October, 2012


Four Key Risks to the Cycle

1. Backlog is too speculative – Out year deliveries do not materialize

2. Sovereign debt concerns in Europe could impact aftermarket

• Europe is almost 30% of the fleet, which consists disproportionately of older aircraft. The domino effect from a decline in air travel could lead to lower corporate profitability

1. The lack of financing could impact aircraft deliveries

2. Air freight has yet to recover, could be a leading indicator


20

October, 2012


Aircraft Financing Still Constructive, European Situation Bears Watching

Source: Boeing


21

October, 2012


Airline Margins tend to Grow Directionally with GDP


22

October, 2012


Cargo’s Another Canary in the Coal Mine, so Trends are Worth Watching

(30%)

(20%)

(10%)

0%

10%

20%

30%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Y/y Chg

Rolling 12 mo

System Revenue Ton Miles (RTM)

(1990 to 2011)


23

October, 2012


Business Jets


24

October, 2012


Corp. Cash Balances and EM Keys to Support Biz Jet Growth


Biz Jet GDP Fleet / Region Fleet US$Tr $Tr GDP North America (US / Canada only) 9,700 16.8 575Europe 1,800 18.0 100Asia & Australia (ex. China & India) 350 12.3 25ME & Africa 700 5.9 125Russia & CIS 380 1.9 200LatAm 1,400 6.3 225China 150 7.0 25India 110 1.8 50Global 14,590 70.0 200

Politically-oriented attacks on the GA

industry have sidelined corp buyers,

but value to business is undisputed.

China and India will continue to drive

biz jet demand. Infrastructure

improving, but continues to be main

bottleneck


25

October, 2012


3-Year Declines are Rare, 4-Year Declines are Unprecedented

Historical Business Jet Deliveries (1965-2011)

0

200

400

600

800

1,000

1,200

1,400

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

(55)% peak to trough, 3 years





26

October, 2012


We Expect a 16% Increase in Deliveries in 2012

Biz Jet Deliveries 2002 to 2015E2002 2003 2004 2005 2006 2007 2008 2009 2010 2011A 2012E 2013E 2014E 2015E

GulfstreamG100/150 14 10 7 8 15 27 33 7 10 7 - - - - G200 / G250 / G280 10 14 15 18 27 32 35 12 14 15 15 30 40 40 G300/350 - - 6 7 6 2 2 2 - - 1 1 1 1 GIV/IVSP / G450 29 27 26 28 30 34 36 32 33 32 32 32 36 35 GV / G500 / G550 32 23 24 28 35 43 50 41 42 46 45 45 45 40 G650 - - - - - - - - - 12 24 38 40 45 Total Gulfstream 85 74 78 89 113 138 156 94 99 112 117 146 162 161 % Change Y/Y 1% (13%) 5% 14% 27% 22% 13% (40%) 5% 0 0 0 0 (0)

CessnaMustang - - - - 1 45 101 125 73 50 60 60 65 70 Citation CJ1 / M2 30 21 20 18 25 34 20 14 3 18 28 32 36 Citation CJ2 / Bravo 127 88 50 44 55 44 56 21 17 15 22 25 30 32 Citation CJ3 - - 6 48 72 78 88 40 20 26 28 30 30 30 Citation CJ4 - - - - - - - - 19 53 38 43 47 50 Citation V/Ultra/Encore 38 22 27 17 14 23 28 5 5 15 15 15 15 Citation VI/Excel/XLS+ 81 48 53 64 73 82 80 44 22 33 20 20 20 20 Latitude 18 18 Sovereign - - 9 46 57 65 77 33 16 18 26 24 20 20 Citation X 31 18 14 14 12 17 16 7 3 5 10 10 17 17 Total Cessna 307 197 179 251 309 388 466 289 178 200 237 255 294 308 % Change Y/Y (2%) (36%) (9%) 40% 23% 26% 20% (38%) (38%) 12% 19% 8% 15% 5%

EmbraerPhenom 100 / 300 - 0 0 0 0 0 2 94 126 83 100 113 116 117 Legacy 450 / 500 - - - - - - - - - - - - 10 26 Legacy 600/650 8 11 13 14 27 35 33 18 10 13 15 16 17 18 Lineage 1000 0 3 8 4 7 8 15 15 Total Embraer 8 11 13 14 27 35 35 115 144 100 122 137 158 176 % Change Y/Y 38% 18% 8% 93% 30% 0% 229% 25% (31%) 22% 12% 15% 11%

Total Cessna, GS, ERJ 400 282 270 354 449 561 657 498 421 412 476 538 614 645 % Change Y/Y 1% (30%) (4%) 31% 27% 25% 17% (24%) (15%) (2%) 16% 13% 14% 5%


27

October, 2012


Biz Jet Ops and Used Jet Inventories are Leading Indicators

0.00

0.05

0.10

0.150.200.25

0.30

0.35

0.40

0.45

0.50

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

30%

Takeoffs & Landings (MM's)

Y/Y Change %

1% Monthly Biz Jet Traffic Jan-01 - Aug-12

\\\

Our discussions with biz jet

brokers indicate that pricing and

inventories in the used market

are starting to firm

Biz jet ops showed steady

decline, but appears to be

stabilizing


28

October, 2012


What Are The Key Competitive Dynamics In Biz Jets Industry?

• Breadth and depth of service matters – US OEMs Cessna and Gulfstream remain market leaders, but ERJ “gets it” and will catch up over time

• Cessna swinging back – ERJ taking bites out of Cessna, but Cessna R&D produces two new planes at NBAA 2011, and apt to drive additional refreshes going forward

• Gulfstream owns the higher-end - ~200 G650 orders even as company turns away speculators. A significant increase in capacity to meet demand is possible

• Industry Potentially Consolidates – Key winners Gulfstream, Cessna, Embraer, growing concern for Dassault and Hawker continues to be on life support. China have been active in acquiring aerospace IP – and is in the running as a white knight


29

October, 2012


Defense


30

October, 2012


Long Term, Defense A “Sleeper Sector”, Beat The S&P 68% of the Last 40 Years

Source: Department of Defense, Thomson Reuters, Company Filings, Morgan Stanley Research

Weapons Authority, Outlays vs. Defense Relative Price

0

1

2

3

4

5

6

1973 1975 1977 1979 1982 1984 1986 1988 1991 1993 1995 1997 2000 2002 2004 2006 2009 2011

Weapons Outlays ($B)

$0

$50

$100

$150

$200

Defense Index

9/11

* Index vs. S&P500 and includes GD, LK, MD, ML, NOC, RTN, LLL, ESY and LOR.

Pres.

Events

Nixon

VietnamBerlin Wall

Falls9/11

Gulf WarGorbachev

Ford Carter Reagan ClintonBush I Bush II

Highest PeacetimeOptempo

11 years

Budget Peak

Consolidation Wave

AfganistanWar

IraqWar

Defense Stock Index*

Budget Outlays, Weapons

Budget Authority, Weapons

Up 12 of 13 years

Obama


31

October, 2012


But Downcycles Aren’t Kind To Defense Stocks

Source: Department of Defense, Thomson Reuters, Company Filings, Morgan Stanley Research

Weapons Authority, Outlays vs. Defense Relative Price

0

1

2

3

4

5

6

1973 1975 1977 1979 1982 1984 1986 1988 1991 1993 1995 1997 2000 2002 2004 2006 2009 2011

Weapons Outlays ($B)

$0

$50

$100

$150

$200

Defense Index

9/11

* Index vs. S&P500 and includes GD, LK, MD, ML, NOC, RTN, LLL, ESY and LOR.

Pres.

Events

Nixon

VietnamBerlin Wall

Falls9/11

Gulf WarGorbachev

Ford Carter Reagan ClintonBush I Bush II

Highest PeacetimeOptempo

11 years

Budget Peak

Consolidation Wave

AfganistanWar

IraqWar

Defense Stock Index*

Budget Outlays, Weapons

Budget Authority, Weapons

Up 12 of 13 years

Obama

A decades’ loss of momentum…


32

October, 2012


Defense valuations have declined steadily – further declines or flattening likely

Note: Defense includes: ATK, GD, HII, LLL, LMT, NOC, and RTNSource: Morgan Stanley Research

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12 YTDDefense Valuation:

P/E 15.1x 15.6x 18.7x 15.7x 17.2x 17.1x 10.4x 10.6x 9.5x 8.8x 9.8xRelative P/E 90% 85% 107% 101% 110% 115% 73% 71% 70% 72% 72%

EV/EBITDA 9.8x 10.0x 10.5x 9.7x 9.7x 9.6x 6.2x 6.3x 5.8x 5.3x 5.7xDividend Yield 1.7% 1.9% 1.5% 1.6% 1.5% 1.5% 2.6% 2.6% 2.7% 3.1% 3.1%

Relative Yield 94% 119% 94% 89% 83% 79% 84% 130% 150% 148% 141%

S&P 500:P/E 16.7x 18.4x 17.4x 15.6x 15.6x 14.9x 14.2x 15.0x 13.6x 12.3x 13.7xDividend Yield 1.8% 1.6% 1.6% 1.8% 1.8% 1.9% 3.1% 2.0% 1.8% 2.1% 2.2%

Defense P/E and EV/EBITDA(1 Year Forward)

4x

6x

8x

10x

12x

14x

16x

18x

20x

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 12 YTD

Defense P/E

Defense EV/EBITDA


33

October, 2012


Key Potential Budget Scenarios – What We See Ahead

1. “Nothing Happens” – Proposed FY13 budget enacted and sequestration avoided

2. “Pushed Out” – Yet another Continuing Resolution sequestration decision pushed out

3. “Collaboration” – $200B of additional cuts over 10 years and full sequestration avoided

4. “Timed Out” – Sequestration triggered and Budget Control Act “phase 2” cuts enacted



34

October, 2012


Scenario 1:“Status Quo” – Proposed FY13 Budget Enacted, Sequestration Avoided

Potential Market Reaction: Defense stocks flat/up – “no sequestration” priced in, but group declines in a market rally

$531 $525$534

$546$556

$567

$400

$450

$500

$550

$600

FY12A FY13E FY14E FY15E FY16E FY17E

FY13 RequestMS Scenario Est. Cumulative Delta

Down ~1% Y/Y

Up ~2% Y/Y

• We’d consider the “Nothing Happens” scenario the Bull Case

Source: Morgan Stanley Research, Department of Defense


35

October, 2012


Scenario 2:“Pushed Out” – Yet another CR sequestration decision pushed out

• We consider the “Pushed Out” scenario as a possibility at this point

$531 $525$534

$546$556

$567

$531

$400

$450

$500

$550

$600



Flat Y/Y

Up ~2% Y/Y

Market Reaction: We est. stocks would remain at current levels as uncertainty remains an overhang



36

October, 2012


Scenario 3: “Collaboration” – $200B of additional cuts over 10 years and sequestration avoided

• We consider the “Collaboration” scenario the Base Case

$547

$567$556

$546$534

$525$531$541

$531$524

$515

$400

$450

$500

$550

$600



Down ~3% Y/Y

Up ~1.5% Y/Y

Market Reaction: We estimate stocks would trade down modestly as this is inline w/ expectations



37

October, 2012


Scenario 4:“Timed Out” – Sequestration triggered & Budget Control Act “phase 2” cuts enacted

• We consider the “Timed Out” scenario the Bear Case

Market Reaction: We est. stocks would sell-off sharply, investors currently anticipate “phase 2” cuts avoided

$471$478

$487$498

$510

$531 $525$534

$546$556

$567

$400

$450

$500

$550

$600



Down ~11% Y/Y

Up ~2% Y/Y



38

October, 2012


Mixed Outlook For Defense Ahead – Macro The Unlikely Savior For Performance

US economy recovers US recovery flat "Double dip" recession

Nothing Happens - Sequestration Avoided Down Flat Up

Pushed out - CR w/ sequestration delayed Down Flat Flat/Up

Collaboration - $200B cuts over 10 yrs Down Flat/Down Flat/Up

Timed Out - BCA phase 2 cuts go enacted Down Sharply Down Down

Bull Case Base Case Bear Case



39

October, 2012


Disclosure sectionThe information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. LLC, and/or Morgan Stanley C.T.V.M. S.A., and/or Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. LLC, Morgan Stanley C.T.V.M. S.A., Morgan Stanley Mexico, Casa de Bolsa, S.A. de C.V. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email [email protected] with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA.

Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Heidi Wood.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies .

Important US Regulatory Disclosures on Subject CompaniesAs of August 31, 2012, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: DigitalGlobe Inc., iRobot Corp., Textron Inc..Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of BE Aerospace Inc, Embraer, Raytheon, ViaSat Inc.. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from BE Aerospace Inc, Boeing Company, DigitalGlobe Inc., Embraer, Huntington Ingalls Industries, Inc, Lockheed Martin Corp., Northrop Grumman Corp., Raytheon, Spirit AeroSystems Holdings Inc., Textron Inc., TransDigm Group Inc., United Technologies, ViaSat Inc., Wesco Aircraft Holdings, Inc.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Alliant Techsystems Inc., BE Aerospace Inc, Boeing Company, DigitalGlobe Inc., Embraer, General Dynamics, Huntington Ingalls Industries, Inc, iRobot Corp., Lockheed Martin Corp., Northrop Grumman Corp., Precision Castparts Corp., Raytheon, Rockwell Collins, Spirit AeroSystems Holdings Inc., Textron Inc., United Technologies, ViaSat Inc., Wesco Aircraft Holdings, Inc.. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Alliant Techsystems Inc., BE Aerospace Inc, Boeing Company, DigitalGlobe Inc., Embraer, General Dynamics, Huntington Ingalls Industries, Inc, Lockheed Martin Corp., Northrop Grumman Corp., Precision Castparts Corp., Raytheon, Spirit AeroSystems Holdings Inc., Textron Inc., TransDigm Group Inc., ViaSat Inc., Wesco Aircraft Holdings, Inc..Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Alliant Techsystems Inc., BE Aerospace Inc, Boeing Company, DigitalGlobe Inc., Embraer, General Dynamics, Huntington Ingalls Industries, Inc, iRobot Corp., Lockheed Martin Corp., Northrop Grumman Corp., Precision Castparts Corp., Raytheon, Rockwell Collins, Spirit AeroSystems Holdings Inc., Textron Inc., TransDigm Group Inc., United Technologies, ViaSat Inc., Wesco Aircraft Holdings, Inc.. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Alliant Techsystems Inc., BE Aerospace Inc, Boeing Company, DigitalGlobe Inc., Embraer, General Dynamics, Huntington Ingalls Industries, Inc, Lockheed Martin Corp., Northrop Grumman Corp., Precision Castparts Corp., Raytheon, Spirit AeroSystems Holdings Inc., Textron Inc., TransDigm Group Inc., United Technologies, ViaSat Inc., Wesco Aircraft Holdings, Inc.. The following companies may be deemed to be controlled by or under common control with Morgan Stanley & Co. LLC, due to ownership, board and/or other relationship:DigitalGlobe Inc.. An employee, director or consultant of Morgan Stanley is a director of General Dynamics. This person is not a research analyst or a member of a research analyst's household. Morgan Stanley & Co. LLC makes a market in the securities of Alliant Techsystems Inc., BE Aerospace Inc, Boeing Company, Embraer, General Dynamics, Huntington Ingalls Industries, Inc, iRobot Corp., Lockheed Martin Corp., Northrop Grumman Corp., Precision Castparts Corp., Raytheon, Rockwell Collins, Spirit AeroSystems Holdings Inc., Textron Inc., TransDigm Group Inc., United Technologies, ViaSat Inc., Wesco Aircraft Holdings, Inc.. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions

http://www.morganstanley.com/institutional/research/conflictpolicies


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Disclosure section

STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution(as of September 30, 2012)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count

% of Total IBC

% of Rating Category

Overweight/Buy 1108 37% 450 41% 41% Equal-weight/Hold 1273 43% 500 45% 39% Not-Rated/Hold 106 4% 30 3% 28% Underweight/Sell 470 16% 122 11% 26% Total 2,957 1102


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Industry Coverage:Aerospace & Defense

Company (Ticker) Rating (as of) Price* (10/03/2012)

Nicolai Sebrell, CFA Embraer (ERJ.N) O (01/27/2011) $25.17 Heidi Wood Alliant Techsystems Inc. (ATK.N) E (06/12/2007) $51.72 BE Aerospace Inc (BEAV.O) E (02/10/2012) $42.31 Boeing Company (BA.N) O (12/12/2011) $69.86 DigitalGlobe Inc. (DGI.N) ++ $21.08 General Dynamics (GD.N) E (04/26/2012) $66.46 Huntington Ingalls Industries, Inc (HII.N)

U (10/02/2012) $41.37

Lockheed Martin Corp. (LMT.N) E (09/24/2010) $93.09 Northrop Grumman Corp. (NOC.N) E (10/18/2002) $68.08 Precision Castparts Corp. (PCP.N) E (03/04/2011) $163.02 Raytheon (RTN.N) E (10/27/2008) $54.98 Rockwell Collins (COL.N) O (04/12/2010) $53.55 Spirit AeroSystems Holdings Inc. (SPR.N)

E (01/13/2011) $22.35

Textron Inc. (TXT.N) O (09/01/2009) $25.46 United Technologies (UTX.N) O (09/26/2011) $78.56 ViaSat Inc. (VSAT.O) E (10/15/2010) $36.68 Wesco Aircraft Holdings, Inc. (WAIR.N)

O (09/06/2011) $13.6

iRobot Corp. (IRBT.O) E (02/20/2007) $23

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.


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