The tide for commercial aerospace appears to have turned, as the global economy continues to recover. Both airline traffic and new aircraft orders have significantly recovered from their recession lows. Therefore, the stocks dealing with aerospace and defense products should be a good pick at least for the next couple years.
Aerospace companies see continued growth in their backlog, with the industry now expected to grow in the mid-single-digit rate. However, the past decade has seen a much slower growth rate, so we have our reservations about this optimistic projection.
The recent rebound in commercial air traffic and a slight increase in defense spend is good news for companies in the segment. Growth in commercial aircraft is expected to be driven by increased demand for new age jet engines which are fuel efficient, have reduced noise levels and exhaust emissions.
The other factor that is expected to drive the upside in the aerospace sector is slow but steady GDP growth that is resulting in relatively steady employment levels. This is having a positive impact on both business and leisure travel, which in turn is positively impacting airline revenue and thus driving demand for aircraft.
The analysts at Stern Agee forecast that Aircraft production and demand for spare parts will increase next year, as carriers move to replace aging fleets with more fuel-efficient jets.
Analysts Peter Arment and Josh Sullivan also expect that the market for business jets will continue to pick up next year. They believe that markets are healthy enough to ensure that the low end of the business jet market continues to stabilize, turning modestly positive by the end of next year.
Drivers of the Aerospace Industry (Sub Sectors)
Growing Demand for Large Civil Aircraft: which are primarily produced by only one U.S. manufacturer, Boeing (BA) and its European competitor Airbus. This sector is clearly one of the most important contributors to the aerospace industry. The demand for large aircraft is expected to grow driven by rapid urbanization and the rise of the middle class in the emerging economies of India and China.
Moreover, with more people taking air transport globally, orders for new aircraft are going to see sustained growth, thereby driving up the profitability for the sector. At the end of the third quarter of 2011, Boeing already had a backlog of $293 billion.
Large Civil Aircraft Jet Engines: The demand for new jets automatically drives the demand for jet engines. The most significant players here are GE Aviation (GE), Pratt & Whitney, a division of UTX (UTX) and U.K.-based Rolls Royce. Commercial engines were the primary drivers of segment growth in the recently reported quarter.
Aircraft Parts: The strength in the other two sectors is driving very strong growth for the parts manufactured by companies, such as Precision Casparts (PCP), Honeywell International (HON), Triumph Group Inc. (TGI) and TransDigm Incorporated (TDG). Over the past few quarters, these companies have reported strong order growth, something that we expect will continue for a while. Given the strong growth potential, we think that these companies represent a good Buying opportunity right now.
After seeing the worst times in 2009, the aerospace industry is finally taking off, with rising order activity fueled by increasing air traffic both domestically and internationally.
The U.S. Aerospace industry is a significant contributor to U.S. exports, jobs and economic growth, which is why the industry is a priority sector. Therefore, the turnaround in the industry is a win-win situation for the investors, employees and employers alike.
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