The aerospace industry is in recovery mode, and its latest earnings report Delta Airlines (Dali) 2.81%, Helps to confirm this. Despite significant ongoing challenges (high fuel costs, labor shortages and a potential economic slowdown), Delta’s management remains in optimistic mode.
In addition, management’s comments on the earnings call suggest the aerospace-giant Raytheon Technologies (rtx) 0.03%,Pilot Training & Simulator Company CAE (cae 1.47%,and advanced composite company hexcel (hxl 0.17%, Favorable end-market conditions. Why over here
First, a recap of the important questions about what makes these three stocks attractive and investment matters for stocks. Raytheon Technologies has a market cap of $141 billion in the aerospace and defense industry. Management Objectives reach $10 billion in free cash flow (FCF) by 2025. It plans to get there through solid growth in its defense business and a strong improvement in its aerospace business.
Due to unfortunate circumstances (the war in Ukraine), Raytheon’s defense business may receive additional orders in the future as the US replaces outdated weapons systems given to Ukraine. Other countries are also increasing defense spending.
However, important questions surrounding its aerospace business pertain to the sustainability of recovery in commercial-flight departures. (Raytheon Collins Aerospace is a major provider of aftermarket parts, and Pratt & Whitney provides engine aftermarket parts.) In addition, investors will want to know that the airlines are in an excellent financial position to place orders as Collins Original Equipment parts and Pratt’s. End provides. Whitney is a major aircraft engine manufacturer.
For CAE, the key to its growth potential is the training market for pilots. This matters for new pilots and the need to retrain existing pilots.
Going into the COVID-19 pandemic, There was already a pilot shortage, and subsequent events have arguably made the situation worse. As air traffic declined due to the pandemic, many pilots retired early, retreated to alternative careers, or refused to continue training.
However, now that the market is in recovery mode, the demand for pilot training has strengthened. So, the key question for CAE investors is what is the capacity-addition outlook for airlines? More flights equal more crew demand, which equals a greater 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, the advanced lightweight composites in the new aircraft consist of a large proportion of the material.
In wide-body aircraft, Hexcel’s composites are more on board because fuel savings are a problem on larger aircraft. Hexcel’s material is lighter and stronger than alternative materials such as aluminum.
As such, Hexcel investors want to hear Airlines Earnings are rising and orders are being placed, the broader market is improving, and major aircraft manufacturers are ramping up production.
Delta gives affirmative answer
If Delta’s management remarks are a helpful guide, investors in all three companies will be happy. Digging into the second quarter earnings call:
- Despite cost pressures from higher fuel and non-fuel costs, underlying solid demand enabled Delta to increase prices, and operating income for the second quarter was near 2019 levels.
- CEO Ed Bastian “has not seen any meaningful reduction in demand yet.”
- President Glenn Hounstein sees that “demand and pricing forces continue into late summer and demand remains strong.”
- High-margin business travel and premium products are making a strong comeback — good profitability news.
- Delta is only operating at 85% capacity as of 2019, so it has great growth potential as it grows to 100%. Bastian thinks it will happen in the summer of 2023.
- Bastian spoke of the “opportunity of deliveries in the next three to five years for some additional narrow-body, larger narrow-body acquisitions” and added, “[W]E’s got a pretty healthy stream of widebodies coming in.”
Simply put, investors in Raytheon, CAE and Hexcel will have heard everything they wanted to hear from Delta Air Lines. Despite ongoing cost pressures, Delta may exceed costs as end-market demand remains strong. This all points to continued improvement in airline profitability, flight departures and aircraft orders. It’s great for Raytheon, CAE and Hexcel.
stock to buy
Despite some weakness in the second quarter from cancellations due to flight delays and the stress of reopening, the commercial-aerospace industry is in good shape. Therefore, any weakness in these three stocks should be considered as a buying opportunity.