The Boeing Company (NYSE/BA) estimates China will require 5,000 aircraft, valued at around $600 billion, over the next 20 years. The company is looking at the new “787 Dreamliner” as its big play on wide-body jet travel despite development issues.
Boeing’s chief rival Embraer S.A. (NYSE/ERJ), the European builder of the “Airbus,” announced on Tuesday morning that it estimates the global demand over the next two decades to be for about 28,000 new planes. There will be over 32,550 planes in the skies by 2031, up from the current 15,500, according to Embraer, and the Asia-Pacific region will account for 35% of all plane purchases. The major airlines will operate in the U.S., China, Intra Western Europe, and India, according to Embraer. China will be the world’s largest domestic plane market in 20 years.
The findings by Embraer are not a surprise and will be driven by higher disposable income in the emerging global markets along with the desire for travel. As I have said in previous commentaries, strong wealth generation in the world’s largest emerging markets, including China and India, will help drive the demand for commercial planes and defense. For investors, I view aerospace as a buying opportunity in the equities market.
Air traffic in China is growing at approximately three times the rate in North America, so the Chinese aviation market is significant. China recognizes this and is 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 decades away.
In the big plane equities market, I like Boeing and Embraer. In the sub-120 seat market, a key player will be Canada-based Bombardier Inc. (TSX/BBD.B), which is also the world’s leading manufacturer of trains.
And while I like Boeing in the large-cap stocks equities market, I also like some of the smaller aerospace parts and retrofit companies in the equities market.
BE Aerospace, Inc. (NASDAQ/BEAV) has been an excellent growth story over the past decade and a good mid-cap aviation play in the equities market. 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 equities market, including commercial, business, and regional jets, and military/helicopter aircraft. The stock trades at an attractive 9.4X 2013 earnings per share (EPS).
In the micro-cap aerospace area, take a look at CPI Aerostructures, Inc. (NYSE/CVU)—a higher-risk aerospace play in the equities market that has added risk. 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. CPI is an aggressive opportunity in the equities market.
I also like the carbon fiber market used in the aerospace sector. (Read “Carbon Fiber: The Moneymaking Metal of the Future.”)
I see growing excitement in the aerospace stocks in the equities market, especially with the airplane builders and the suppliers of aircraft parts and services.