Strong wealth generation in the world’s largest emerging markets such as China and India will help to drive the demand for commercial planes and defense.
For investors, it’s a buying opportunity.
The Boeing Company (NYSE/BA) estimates that China will require 5,000 aircrafts valued at around $600 billion over the next 20 years. China needs everything to fuel its growth, as I discussed in How China’s Craving for Raw Materials Will Affect You.
Air traffic in China is growing at around three times the rate in North America, so the Chinese aviation market is significant and a buying opportunity for companies in it. China recognizes this and is currently developing its own commercial aviation program that will see the manufacturing of airplanes with capacity of over 150 passengers. There are no concerns at this time, as this is still perhaps years and as much as a decade away.
The global aerospace market is estimated to surpass $500 billion by 2012, according to Global Industry Analysts, Inc. in its report, Aerospace and Defense Industry: A Global Strategic Business Report. I view this as a buying opportunity.
Boeing is a major player in the aerospace sector and a buying opportunity. The other major player is Embraer S.A. (NYSE/ERJ), the European builder of the “Airbus.”
Boeing reported a stellar first quarter in which revenues grew at 30% year-over-year to $19.38 billion, while earnings surged 58% year-over-year to $923 million. The results were impressive and reflect the economic renewal and increased spending on aircrafts. The total backlog for commercial and defense came in at a record $380 billion and over 4,000 planes to be delivered. A big coup for Boeing was a recent $6.0-billion order from China Eastern Airlines, which appears to be favoring the Boeing “777” over the Airbus A330.
And, while I like Boeing in the large-cap stocks space as a buying opportunity, I also like some of the smaller aerospace parts and retrofit companies.
BE Aerospace, Inc. (NASDAQ/BEAV) has been an excellent growth story over the past decade and is a buying opportunity. The company makes the interior cabin products for both the new and retrofit markets.
Spirit AeroSystems Holdings, Inc. (NYSE/SPR) was formed in 2005 after Onex Corporation bought Spirit AeroSystems from Boeing Commercial Airplanes. The company is developing into a key mid-size player in the aerospace sector including commercial, business and regional jets, and military/helicopter aircrafts. The company operates via three major commercial aviation segments: Fuselage Systems, Propulsion Systems, and Wing Systems. The company finished the third quarter with an order backlog of about $30.0 billion. The stock trades at an attractive 9.58X 2013 earnings per share and a cheap price-to-earnings growth ratio of 1.03. Spirit is a buying opportunity.
In the micro-cap aerospace area, take a look at CPI Aerostructures, Inc. (NYSE/CVU)—a higher-risk aerospace buying opportunity with added risk and a member of the Russell Microcap Index. The company manufactures structural aircraft parts mainly for the U.S. Air Force along with other areas of the U.S. defense sector. In its supply role, the company will either be a prime contractor or a subcontractor for other companies. For the U.S. military, the company is a prime contractor of skin panels, leading edges, flight control surfaces, engine components, wing tips, cowl doors, nacelle assemblies, and inlet assemblies geared for various military planes. The company also supplies parts for the UH-60 “Blackhawk” helicopter. For speculators, CPI is a buying opportunity.
Please note the stocks mentioned are meant for illustrative purposes regarding buying opportunities and are not meant as specific recommendations to buy.