The aerospace industry is in recovery mode, and the latest earnings report from Delta Air Lines helps confirm it. Despite significant ongoing challenges (high fuel costs, labor shortages, and a possible economic slowdown), Delta's management remains in an optimistic mode.
Moreover, management's commentary on the earnings call suggests aerospace-giant Raytheon Technologies, pilot training, and simulator company CAE, and advanced composite company Hexcel have favorable end-market conditions. Here's why.
First, a recap of what makes these three stocks attractive and the critical questions around the investment cases for the stocks. Raytheon Technologies is a $141 billion market cap behemoth in the aerospace and defense industry. Management aims to reach $10 billion in free cash flow (FCF) by 2025. It plans to get there through solid growth in its defense business and a robust recovery in its aerospace business.
Due to unfortunate circumstances (war in Ukraine), Raytheon's defense business may receive additional orders in the future as the U.S. replaces older weapons systems given to Ukraine. Other countries are also stepping up defense spending.
However, the critical questions around its aerospace business relate to the durability of the recovery in commercial-flight departures. (Raytheon's Collins Aerospace is a major provider of aftermarket parts, and Pratt & Whitney provides engine aftermarket parts.) In addition, investors will want to know that airlines are in an excellent financial position to make orders as Collins provides original equipment parts and Pratt & Whitney is a major aircraft engine manufacturer.
For CAE, the key to its growth potential is the training market for pilots. That counts for new pilots and existing pilots needing retraining.
Going into the COVID-19 pandemic, there was already a pilot shortage looming, and events since then have arguably made the situation worse. As air traffic slumped due to the pandemic, many pilots retired early, retrained in alternative careers, or declined to continue training.
However, now that the market is in recovery mode, demand for pilot training has returned strong. As such, the critical question for CAE investors is, what is the capacity-growth outlook for airlines? More flights equal more demand for the crew, which equals more need for pilot training.
There isn't much aftermarket for Hexcel's advanced composites, so increased aircraft production is key to the company's long-term growth. In addition, newer aircraft tend to have a higher portion of the content in advanced lightweight composites.
Wide-body aircraft tend to have more of Hexcel's 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.
As such, Hexcel investors want to hear that the airlines are growing earnings and placing orders, the wide-body market is recovering, and leading aircraft manufacturers are ramping up production.
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Article initially appeared on motleyfool.com
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