George Leong: The “Boeing 787 Dreamliner” may be grounded for the time being, but the aerospace sector as a whole is delivering some excellent results.
We all know how significant the Chinese aerospace market is, given the superlative rise in air travel and tourism in and out of the country. I expect this to increase going forward.
The Boeing Company (NYSE:BA) estimates that China will require 5,000 aircrafts, valued at approximately $600 billion, over the next 20 years. The estimate may be conservative, especially if China can grow its income levels at a much higher pace. Boeing is looking at its new 787 Dreamliner as its big play on wide-body jet travel in spite of current issues.
Chief rival Embraer S.A. (NYSE:ERJ) estimates that the global demand will be around 28,000 new planes over the next two decades. According to Embraer, there will be over 32,550 planes in the sky by 2031, up from the current 15,500; the company also estimates that the Asia-Pacific region will account for 35% of all plane purchases. According to Embraer, the major airlines will operate in the U.S., China, intra-Western Europe, and India; and China will be the world’s largest domestic plane market in 20 years.
The findings by Embraer are not a surprise, as they will be driven by higher average disposable incomes in the emerging global markets and by the more popular desire for travel. My feeling is that strong wealth generation in the world’s largest emerging markets, including China and India, will help to drive the demand for commercial and defense planes along with stocks in the equities market.
Air traffic in China is growing at approximately three-times the rate of air traffic in North America, so the Chinese aviation market is significant. China recognizes this, and it is developing its own commercial aviation program that will see the manufacturing of airplanes with a seating capacity of more than 150 passengers. There are no concerns at this time, as this is still decades away.
For investors, I view aerospace as a buying opportunity in the equities market.
Just take a look at the SPDR S&P Aerospace & Defense (NYSEARCA:XAR) exchange-traded fund (ETF), which is hovering at its highest level in a year, recently breaking through resistance as shown by the horizontal blue line on the chart below.
Chart courtesy of www.StockCharts.com
So what companies should you look to buy?
In the big plane equities market, I like Boeing and Embraer. In the sub-120 seat market, a key player is Canada-based Bombardier Inc. (TSE:BBD-B), which is also the world’s largest train manufacturer.
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 products for the interior cabins of planes for both the new and retrofit markets.
Chart courtesy of www.StockCharts.com
Spirit AeroSystems Holdings, Inc. (NYSE:SPR) was formed in 2005 after Onex Corporation bought Spirit AeroSystems (Europe) Ltd. from Boeing Commercial Airplanes. The company is developing into a key mid-sized player in the aerospace equities market, including commercial, business, and regional jets, and military/helicopter aircrafts. The stock trades at an attractive 7.8X 2013 earnings per share (EPS).
In the micro-cap aerospace area, you may want to 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 investment opportunity in the equities market.
In my view, I see growing excitement in aerospace stocks in the equities market, especially with the airplane builders and parts and services suppliers.