Transportation Industry Valuation Considerations
Gordon Brothers’ experts provide key short- and long-term valuation considerations for the aircraft, engine and parts manufacturing, automotive manufacturing and recreational vehicle sectors in the U.S.
When appraising aircraft, engines and parts, lenders should be aware that long-term agreements can make inventory more valuable and, in a liquidation, raw materials could retain a higher value.
Within the automotive machinery, lenders should expect appraisers to consider machinery’s age, maintenance and use when estimating its value and should be cautious of customized or cost-prohibitive equipment with potential for a limited value of return.
Regarding recreational vehicles (RVs), lenders should consider a seasonality analysis for appraisals to better understand the extent to which seasonal buying trends may affect values. A high-low analysis may also help mitigate risk for RV dealers or other businesses with seasonal fluctuations.
Our experts provide additional valuation considerations for the transportation industry below.
AIRCRAFT, ENGINE & PARTS MANUFACTURING
Forecasts indicate the aircraft, engine and parts manufacturing industry revenue in the U.S. will increase through 2027 because of the increase in military hardware exports and an anticipated short-term increase in the defense budget.
Additionally, industry experts anticipate defense sector growth as the production of aircrafts begin to ramp up, but even with the increased demand for commercial aircraft and the defense market picking up, profit for the industry will most likely remain constrained because of volatile purchase costs. Rising inflation, interest rates, and environmental and government regulations for fuel efficiency have the potential to negatively affect the industry over the next several years.
In the short term, Gordon Brothers recommends monitoring costs as any deterioration in margin would have a negative effect on appraisal values. In the long-term, our firm recommends monitoring inventory levels, specifically slower moving inventory, as an accumulation can occur over time rendering the inventory undesirable or obsolete.
Long-Term Agreements Make Inventory More Valuable
Aircraft, engine and part original equipment manufacturers (OEMs) use long-term agreements (LTAs) to manage the cost of subcontracted parts and secure the supply chain.
When entertaining LTAs, OEMs typically consider the size of the supplier pool for the parts, the time it takes to bring suppliers on board, regulatory requirements and a supplier’s reputation.
Since aircraft manufacturers are obligated to purchase finished goods produced under contract, lenders should be aware that aircraft parts suppliers’ inventory subject to an LTA typically carries higher liquidation values. In contrast, suppliers that are manufacturing to forecasts could be subject to deeper discounts because they do not benefit from a guaranteed exit strategy.
Inventory Intended for Active Platforms
Like automobiles, aircraft manufacturers are continually phasing models in and out of production. Inventory manufactured or warehoused for current models typically retains more value than inventory for retired models. While planes remain in operation for many years after being discontinued, predicting the need for replacement parts becomes more challenging.
Manufacturers often produce more parts than are ordered and maintain extra quantities as spares because of the products’ specialized nature and the economics of order-size efficiencies. With airlines cutting energy costs and optimize their fleets, this will be especially important as major industry players like Boeing and Airbus replace older aircraft with newer, fuel-efficient models. Inactive spares typically retain minimal value in a liquidation scenario.
Raw Material Lead Times Affect Value
Some aircraft components require specialty metals in proprietary forms to meet performance requirements. These alloys may be lighter or have different chemical properties that enable them to wear longer and withstand greater stress, but the six-month or longer lead times for these raw materials can be lengthy.
Manufacturers producing these types of products, including castings, forgings, various nickel alloys and aviation-grade aluminum and titanium, among other alloys, should procure these materials subject to their existing orders or LTAs.
Lenders should keep in mind these raw materials would likely retain a higher value in a liquidation as the customer contracting the parts would be motivated to purchase to minimize disruption and production delays. In some cases, the OEM or the agent of the OEM may purchase these metals, increasing the likelihood they would buy them back in a liquidation.
Automotive production machinery and equipment values have remained steady, and activity for late model, quality used equipment in the secondary market has increased while large tonnage stamping press values have improved over the last year.
Auction activities have returned to pre-pandemic levels in the U.S. and Canada with facilities hosting a variety of live, online and webcast auctions. Gordon Brothers expects the secondary market to resume near-normal functions. However, there will be a high level of dealer inventory to work through, and more equipment will likely come to market because of plant closures and consolidations.
Maintenance Critical to Value
Automotive manufacturing’s key value considerations include machinery’s age, maintenance practices and use. Consumers generally want newer equipment, as the market seeks the most modern technology. While still saleable, older equipment will decline in value as buyers purchase newer equipment.
Maintenance practices are essential as proper care can extend equipment’s use beyond what’s expected. Conversely, poor maintenance can shorten machinery’s life and lead to production issues.
The amount of use is important since a machine that runs on a single shift will have a longer chronological life than a machine running multiple shifts, which can increase the effective age and reduce the remaining life affecting value.
Lenders should expect appraisers consider age, maintenance and use when estimating machinery’s value.
Lenders Should Be Wary of Certain Collateral
Custom assembly, sequencing and single-purpose automotive production machinery is generally expensive because of high design and engineering costs. These machines will have a very limited resale value unless a manufacturer making the exact same part buys them. In liquidation scenarios, these machines generally have only component or scrap value.
Other equipment with potential for a limited value of return includes painting equipment, part-specific test and measurement equipment and installation-intensive equipment, which can be cost prohibitive to remove. Standard metalworking and plastics equipment that are common in many types of manufacturing are typically widely marketable and represent good collateral.
Demand for RVs and the components and chassis used in their manufacturing over the next several years may slow industry growth because of inflation, rising interest rates, and increasing environmental and government regulations regarding fuel efficiency in the U.S.
In the short term, Gordon Brothers expects a slight decrease in finished vehicle inventory appraisal values as demand wanes and the market slows.
Seasonality a Factor
RV retailers typically stock up on inventory from March through May to prepare for the peak spring and summer sale and driving season.
Lenders should consider a seasonality analysis for appraisals in the RV sector to better understand the extent to which seasonal buying trends may affect values. A high-low analysis, which illustrates values during peak and valley demand periods, may also help mitigate risk for RV dealers or other businesses with seasonal fluctuations.
Component Parts Vary in Marketability
Manufacturers’ inventories are primarily composed of parts they purchase from suppliers. Usage frequency increases part value, so RV parts specific to platforms, such as awnings, extrusions, wiring harnesses, tables, windows and doors, typically have low recovery values.
Other inventory like carpeting and wall coverings can be marketed to buyers outside the RV industry and fare better. Analysts expect televisions, appliances, mattresses, aluminum or fiberglass sheets, and other, more generic and widely marketable items to have the highest net recoveries.
Major Inventory Category
A chassis is the base frame of the vehicle along with wheels, engine and transmission. In some cases, the chassis may include the cab and steering mechanisms as well. The chassis is not necessarily the most valuable category in a liquidation, though it is one of the most significant portions of RV cost.
Appraisers must analyze supply and demand for each platform to estimate recoveries. Lenders should be aware modified chassis have limited value in a liquidation scenario.
Financing Assumptions Are Important
Most manufacturers do not typically make vehicles to stock apart from towable vehicles and instead manufacture based on independent dealers’ orders. As a result, units would continue to sell through this channel in a liquidation.
Dealers typically purchase units with floor plan financing, which is a revolving line of credit against a specific piece of collateral, like an RV. This means a distributor or dealer accepts merchandise shipments from a manufacturer by borrowing funds with repayment terms linked to the merchandise sale or according to a schedule.
Gordon Brothers’ appraisers assume dealers would have access to these plans in a liquidation scenario, or they could arrange alternative financing. In some cases, manufacturers have repurchase agreements through which they can buy back unsold units at a discount if they do not sell within specific timeframes. Dealers accustomed to these terms will seek greater discounts in liquidation.
Lack of Warranty Lowers Recoveries
New RV buyers can typically expect three- to five-year warranties. However, manufacturers do not honor these contracts in a liquidation, so they must either sell units without a warranty or assume the associated liability. Dealers should expect steeper discounts when purchasing RVs in liquidation because of this additional risk.
Gordon Brothers expects transportation inventory appraisal values to remain relatively stable in the short-term, except for aircraft manufacturing in which values may decrease over the next year as the industry continues to recover from the onset of the pandemic. However, uncertainty amid ongoing global supply chain and economic challenges may affect values going forward.
Contact us to learn more about how our team of experts can help you maximize value in an evolving marketplace.