For the retail investor, finding the right investment is the key to building a successful portfolio. Investors have put together a range of strategies, from buying into dividends to following corporation insiders. But sometimes, finding an industrial sector can work just as well.
Canadian banking giant RBC has been watching the aerospace sector, and believes we are in the early innings of a substantial commercial aero recovery as passenger confidence continues to improve and vaccination rates increase.
RBC analyst Kenneth Herbert, rated 5-stars by TipRanks, wrote his firm’s report on the sector, saying, “We favor stocks with exposure to both the commercial aftermarket (AM) and original equipment (OE) cycle, with greater confidence in the commercial AM upside in 2022... As part of our coverage launch, we spoke to and collected information from over 30 commercial aerospace MRO providers, parts distributors, and OEMs. We believe the commercial AM grew ~6% sequentially in 3Q21, a slight deceleration due the Delta variant impact. Pricing was a 3%+ tailwind in the quarter. We model 15-20% growth in 2022."
Against this backdrop, Herbert has selected three aerospace stocks that investors should consider buying into. Opening up the TipRanks database, we’ve pulled up the details on Herbert's picks to see whether they could be a good fit for your portfolio. Let's take a closer look.
First up is Spirit AeroSystems, a company with a foot in both the civil and defense aerospace sectors. This $4.5 billion company is the world’s largest manufacturer of aerostructures – vital airframe sections and components. The company is a contractor with Boeing, building fuselage sections for the 737 and 787 airliners, along with cockpit units for nearly all of Boeing’s products. Spirit also builds fuselage sections and wing spars for Airbus, and is a major builder of wings, pylons, and nacelles across the industry.
In addition to the commercial activity above, Spirit has a strong defense presence. The company builds fuselage sections of Boeing’s P8-A Poseidon maritime patrol aircraft – which was derived from the 737 airliner. The company also works with Lockheed/Sikorsky on the CH53K King Stallion military helicopters, building lightweight fuselages for the heavy lift chopper. Spirit is also involved in Northrup Grumman’s B-21 Raider bomber project.
All this work – and more – has accelerated since the middle of last year. As the COVID pandemic receded, and the economy reopened, SPR shares climbed rapidly, and the stock is now up 125% in the last 12 months.
While Spirit’s revenue and earnings have not returned to pre-COVID levels, the top line is growing slowly. At $1 billion for 2Q21, Spirit’s quarterly revenue was up 55% year-over-year, and up a more modest 11% from Q1. EPS came in at a loss of 31 cents – but that was the lowest loss of the last 6 quarters. Spirit is scheduled to report its Q3 earnings on November 3, before the markets open.
Herbert likes Spirit, along with its diverse programs, and writes: “We believe SPR represents an attractive way to play the commercial aerospace recovery. Through its exposure to the 737 MAX, the company is more leveraged to narrow body aircraft and should benefit from a strong recovery in sales, margins and FCF. SPR's diversification also provides greater exposure to Airbus, business jets, defense and the commercial aftermarket recovery.”
In line with these comments, Herbert rates Spirit an Outperform (i.e. Buy), and his $62 price target implies it has room for 47% growth in the next 12 months. (To watch Herbert’s track record, click here)
Overall, Spirit gets a Strong Buy rating from a unanimous analyst consensus, based on 9 positive stock reviews. The shares are selling for $42.22 and their average target of $59.33 indicates potential for ~40% upside in the year ahead. (See Spirit stock analysis on TipRanks)
Next up is one of the aerospace industry’s storied names, The Boeing Company. Boeing, which came to fame for its B-17 and B-29 bombers in the Second World War, has been a dominant player in the commercial aircraft industry – as well as a major player in the defense segment – for the past 75 years. Boeing hit a hard speedbump in late 2018, when two of its 737-MAX 8 airliners, new models of the company’s most popular commercial product, suffered fatal accidents quick succession. To make matters worse, the COVID pandemic hit just as the company was ready to return to normal production.
Boeing has plenty of other projects to lean on, but not with the profit potential of the industry’s best-selling commercial airliner. Still, the other models of the 737, ongoing production of the company’s other airliners, especially the 777 family, and the F/A-18 E/F Super Hornet fighter aircraft all combined to keep Boeing afloat through the difficulties – and in Q2 of this year, the company returned to profitability for the first time since 2019.
The Q2 report showed $17 billion in top-line revenue, the best print since 4Q19. The Q2 revenues were up 44% year-over-year, and up almost 12% sequentially from Q1. The real excitement came from the EPS, which was reported at 40 cents per share. This was up from the $4.79 EPS loss reported in the year-ago quarter, and the $1.53 EPS loss reported in Q1. Boeing will report its Q3 earnings on October 27, before the markets open.
Boeing’s biggest advantage comes from scale. The company has over 10,000 commercial airliners currently in service, and customers have another 5,700 airframes on order. This huge backlog of work – in both maintenance and new production – gives Boeing a steady income stream to rely on in adversity. And with the return of the 737 MAX series aircraft to production, that picture will only improve.
In his note for RBC, Herbert points out the MAX specifically as a positive for Boeing, saying, “MAX deliveries expected to be strong source of 2022-2023 FCF. Through 3Q21 Boeing had delivered ~170 MAX aircraft. We estimate that as of 3Q21 BA currently has ~375 MAX aircraft still in inventory…. The pace of the MAX recovery has been slower than investors and management had expected, but we believe the demand environment for narrowbody aircraft to support domestic travel remains strong, and the expected 4Q21 re-certification of the MAX in China will support the acceleration in 2022.”
In line with his upbeat outlook on the company, Herbert rates Boeing an Outperform (i.e. Buy), and sets a $275 price target, suggesting an upside of 31% for the coming year.
All in all, Boeing's Moderate Buy consensus rating is based on 14 reviews, including 9 Buys and 5 Holds. The shares are selling for $209.81, and the average target price of $275.67 is in line with Herbert's, suggesting a one-year upside of 31%. (See Boeing stock analysis on TipRanks)
Last on our RBC list is AAR Corporation, an important company in the aerospace industry’s after market supply system. The company is based in Wood Dale, Illinois, a suburb of Chicago adjacent to O’Hare International Airport, currently the world’s sixth busiest airport hub. AAR benefits from its proximity to a major air hub, and has built itself a reputation as a parts maker with global reach.
The company is heavily invested in both commercial and defense industrial programs. On the defense side, the company won a 15-year, $909 million contract for supply-chain management support for the US Air Force’s C-130, KC-135, and E-3 program landing gear parts. Over the next three years, the company won an addition 10 further Federal government contracts, worth an estimated $1.35 billion.
On the commercial side, AAR is a major supplier of maintenance, repair, and overhaul (MRO) services, including airframe maintenance for Airbus, Boeing, Bombardier, and Embraer. Together, those four companies build the majority of all commercial airliners. AAR has over 2 million square feet of hanger space available for maintenance operations. AAR also offers factory-new, after-market parts for airframes and engines, as well as overhauled and refurbished used parts.
AAR in September reported its fiscal 1Q22 results. The company saw its commercial sales grow from 44% of the total to 59%, a gain that propelled the total revenue to $455 million. The top line was up 14% year-over-year, and marked the fourth consecutive quarter of sequential revenue gains. EPS came in at 52 cents, an impressive gain of 205% year-over-year. The company saw $18 million cash from operations during the quarter, and finished the quarter with $48.8 million in unrestricted cash assets.
RBC’s Herbert takes an upbeat view of AAR going forward, writing: “We believe AAR is poised to benefit from the recovery in the commercial aerospace aftermarket, and continued improvement in execution will support positive investor sentiment. AAR faces headwinds in its Government services business as forward U.S. troop deployments come down, but we believe total commercial sales will recover to 98% of pre-COVID levels in FY23.”
In line with his bullish stance, Herbert rates AIR an Outperform (i.e. Buy), and his $45 price target implies room for ~30% upside potential in the next 12 months.
While there are only three recent analyst reviews on this stock, they are unanimous that it is a Buy proposition, making for a Strong Buy consensus rating. The shares are priced at $34.82 and the average price target – $49 – implies ~41% one-year upside. (See AIR stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
