3 aerospace stocks to buy before the market recovers

The aerospace industry is in recovery mode and the latest earnings report of Delta Airlines (FROM THE 2.81%) helps confirm this. Despite significant ongoing challenges (high fuel costs, labor shortages and a possible economic slowdown), Delta’s management remains in an optimistic mode.

Additionally, management’s comment on the earnings call suggests an aerospace giant Raytheon technologies (RTX 0.03%)pilot and simulator training company CAE (CAE 1.47%)and an advanced composite company Hexadecimal (HXL 0.17%) have favorable final market conditions. Here because.

Raytheon technologies

First, a summary of what makes these three stocks attractive and the critical investment case questions for the stocks. Raytheon Technologies is a colossus with a market capitalization of $ 141 billion in the aerospace and defense industry. Management aims to achieve $ 10 billion in free cash flow (FCF) by 2025. It plans to do so through solid growth in its defense business and a solid recovery in its aerospace business.

Due to unfortunate circumstances (war in Ukraine), Raytheon’s defense business may receive further orders in the future as the US will replace the old weapon systems supplied to Ukraine. Other countries are also increasing defense spending.

However, critical issues relating to its aerospace business relate to the duration of resumption of commercial flight departures. (Raytheon’s Collins Aerospace is a leading aftermarket parts supplier and Pratt & Whitney supplies aftermarket parts for engines.) Additionally, investors will want to know that airlines are in an excellent financial position to place orders as Collins supplies parts of original equipment and Pratt & Whitney is a major manufacturer of aircraft engines.

CAE

For CAE, the key to its growth potential is the training market for pilots. This matters to new pilots and existing pilots who need retraining.

Entering the COVID-19 pandemic, there was already a looming pilot shortage and events since then have likely made matters worse. With the collapse of air traffic due to the pandemic, many pilots have retired early, retrained for alternative careers or refused to continue training.

However, now that the market is in recovery mode, the demand for pilot training is back strong. As such, the fundamental question for CAE investors is: what are the capacity growth prospects for airlines? More flights equate to a greater demand for crew, which equates to a greater need for pilot training.

Hexadecimal

There isn’t much aftermarket for Hexcel’s advanced composites, so increasing aircraft production is key to the company’s long-term growth. In addition, newer aircraft tend to have a larger portion of the content in advanced lightweight composites.

Wide-body aircraft tend to have more Hexcel composites on board as fuel economy is more of an issue on larger aircraft. Hexcel’s materials are lighter and stronger than alternative materials such as aluminum.

Therefore, Hexcel investors want to know that airlines are increasing profits and placing orders, the wide-body market is recovering, and major aircraft manufacturers are ramping up production.

Delta gives positive feedback

If Delta’s management comment is any useful guide, investors from all three companies will be happy. Digging into the second quarter earnings call:

  • Despite cost pressures from high fuel and non-fuel costs, strong underlying demand allowed Delta to raise prices and operating profit was close to 2019 levels for the second quarter.
  • CEO Ed Bastian “hasn’t seen any significant drop in demand yet.”
  • President Glen Hauenstein sees “the strength of demand and prices continue through late summer and fall as demand remains strong.”
  • Higher-margin business travel and premium products are making a comeback – good news on profitability.
  • Delta only runs at 85% capacity, compared to 2019, so there is great growth potential as it goes up to 100%. Bastian thinks it will be in the summer of 2023.
  • Bastian spoke of “an opportunity in the next three to five years of delivery for some additional tight-bodied and large-tight-bodied acquisitions” and said: “[W]We have a pretty healthy stream of widebodies on the way. ”

Simply put, investors in Raytheon, CAE and Hexcel would have heard everything they wanted to hear from Delta Air Lines. Despite continuing cost pressures, Delta can pass on costs because end market demand remains solid. Everything points to a continuing recovery in airline profitability, flight departures and aircraft orders. It’s great for Raytheon, CAE, and Hexcel.

Shares to buy

Despite some weaknesses in the second quarter due to flight delays and cancellations due to the stress of the reopening, the commercial aerospace industry is in good shape. Therefore, any weakness in these three stocks should be viewed as a buying opportunity.

Lee Samaha has no position in any of the titles mentioned. The Motley Fool recommends Delta Air Lines and Hexcel. The Motley Fool has a disclosure policy.

Leave a Reply

%d bloggers like this: