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Boeing's Big News Is Bigger News for These 3 Companies
When it comes to the commercial aircraft manufacturing industry, Boeing(NYSE: BA) is too big to trail. It's the largest U.S. exporter and a pivotal part of the economy. Its commercial aerospace and defense businesses provide employment and a key end market for leading companies such as GE Aerospace(NYSE: GE), RTX(NYSE: RTX), and smaller but no less crucial suppliers like Hexcel(NYSE: HXL).
That's why its latest news is great news for those three suppliers and affirms that Boeing will receive the support necessary to stay a leading player in the aerospace market. Here's why.
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Boeing's big news
At the end of October, Boeing announced the pricing of a public offering of 112.5 million shares at $143 and $5 billion in depositary shares, helping to shore up its balance sheet by almost $21.1 billion. The equity raise diluted existing shareholders but aligns with management's commitment to maintaining an investment-grade debt rating.
Image source: Boeing.
It's important not to underestimate the event's importance for the long-term case for buying the stock. It isn't just about muddling through a problematic medium-term period; Boeing must ensure its position to invest in the next generation of airplanes.
While the mid-2030s may seem a long way off (former CEO Dave Calhoun said there wouldn't be a new airplane in place before 2035), the reality is that it takes many years of investment to develop a new aircraft. Meanwhile, Wall Street analysts have Boeing with a cash outflow of $14.1 billion in 2024 and then $2.7 billion in 2025 before turning positive in 2026 with $5.3 billion.
As such, the equity raise is entirely understandable. Boeing may now enjoy a practical duopoly with Airbus. Still, by the time the next generation of aircraft is in play, China's Comac and possibly Russia's Yakovlev may have narrow-body airplanes capable of capturing orders beyond their domestic markets. Brazil's Embraer can develop a narrow-body airplane capable of competing, too.
Image source: Getty Images.
Good news for Boeing, better news for its suppliers
Couched in the terms above, it's clear that original equipment (OE) suppliers like RTX, commercial engine supplier GE Aerospace, and advanced materials supplier Hexcel need a strong Boeing. (OE manufacturers supply the parts used in the construction of new aircraft, as opposed to aftermarket suppliers, which make replacement parts.)
All three have suffered sales shortfalls this year as airplane production at Boeing (and Airbus) has been less than management envisaged at the start of the year. RTX and GE Aerospace also play in the commercial aerospace aftermarket, but Hexcel's aerospace sales almost entirely come from the OE market.
A lack of new airplane deliveries has boosted aftermarket demand because older planes are in service longer. As previously discussed, GE Aerospace's management now expects the peak period for shop visits for its older CFM56 engine (used on the legacy Airbus A320 family and the Boeing 737) to extend from an original expectation of 2025 by another couple of years.
Image source: Getty Images.
The near-term impact can also be seen in the divergence in RTX's Collins Aerospace business, whereby commercial OE sales declined 8% year over year in the third quarter while the commercial aftermarket rose 9%.
These differing dynamics are a large part of the reason RTX and GE Aerospace have performed well this year, while Hexcel (which generated 39% of its sales from Airbus and its subcontractors in 2023 and 15% from Boeing and its subcontractors) has suffered.
Hexcel started the year expecting $1.925 billion to $2.025 billion in sales, only to downgrade expectations to $1.9 billion to $1.98 billion as airplane production has disappointed this year.
BA Chart
What Boeing's news means to GE Aerospace, RTX, and Hexcel
Investors who enjoy making mental risk/reward calculations will appreciate that the risk around these three companies' OE sales has declined now that Boeing has shored up its balance sheet.
Not only will the equity raise help ensure Boeing has the near-term resources to ramp up airplane production, but it will also help reassure the aerospace sector that it will be able to tap the credit markets to finance investment in a new generation of narrow-body airplanes. The failure to adequately do the latter could have significant ramifications for the U.S. economy.
While the equity raise is good news for Boeing and its long-term operational objectives, it's better for suppliers. A lower risk profile makes RTX, GE Aerospace, and Hexcel more attractive stocks, as Boeing's airplanes are too important to be left behind in the commercial aerospace race.
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