High Oil Prices Can’t Touch These Aerospace Players

By George Leong for Investment Contrarians | Aug 1, 2012

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Oil is trading at just below $90.00 a barrel, and we continue to see a build-up in capacity in the aviation sector. It was the same even when oil prices were over $100.00 a barrel. Air travel prices continue to edge higher as airlines cut capacity and some routes.

And better yet, strong wealth generation in the world’s largest emerging markets, including China and India, will help to drive the demand for commercial planes and defense. For investors, I view aerospace as a buying opportunity in the equities market.

The Boeing Company (NYSE/BA) estimates China will require 5,000 aircrafts valued at around $600 billion over the next 20 years. The company is looking at the new “787 Dreamliner,” as its big play on wide-body jet travel despite development issues.

Air traffic in China is growing at approximately three times the rate in North America, so the Chinese aviation market is significant. China recognizes this and is developing its own commercial aviation program that will see the manufacturing of airplanes with capacity of over 150 passengers. There are no concerns at this time, as this is still decades away.

The global aerospace market is estimated to surpass $500 billion by 2012, according to Global Industry Analysts, Inc. in its report, “Aerospace and Defense Industry: A Global Strategic Business Report.” I see buying opportunities in the equities market.

Boeing is a major player in the global aerospace sector and excellent aerospace play in the equities market. The other major play in the equities market is Embraer S.A. (NYSE/ERJ), the European builder of the Airbus. The two companies are in a battle for the 120-plus seats market. Canada-based Bombardier Inc. (TSX/BBD.B) is a leading maker of sub-120 seat planes.

And while I like Boeing in the large-cap stocks equities market, I also like some of the smaller aerospace parts and retrofit companies.

BE Aerospace, Inc. (NASDAQ/BEAV) has been an excellent growth story over the past decade and a good mid-cap aviation play in the equities market. The company makes the interior cabin products for both the new and retrofit markets.

Spirit AeroSystems Holdings, Inc. (NYSE/SPR) was formed in 2005 after Onex Corporation bought Spirit AeroSystems from Boeing Commercial Airplanes. The company is developing into a key mid-size player in the aerospace equities market, including commercial, business, and regional jets and military/helicopter aircrafts. The company operates via three major commercial aviation segments: Fuselage Systems, Propulsion Systems, and Wing Systems. The company finished the third quarter with an order backlog of about $30.0 billion. The stock trades at an attractive 8.92X 2013 earnings per share (EPS) and a cheap price/earnings to growth (PEG) ratio of 0.96.

Chart courtesy of www.StockCharts.com

In the micro-cap aerospace area, take a look at CPI Aerostructures, Inc. (NYSE/CVU)—a higher-risk aerospace play in the equities market that has added risk. The company manufactures structural aircraft parts mainly for the U.S. Air Force along with other areas of the U.S. defense sector. In its supply role, the company will either be a prime contractor or a subcontractor for other companies. For the U.S. military, the company is a prime contractor of skin panels, leading edges, flight control surfaces, engine components, wing tips, cowl doors, nacelle assemblies, and inlet assemblies geared for various military planes. The company also supplies parts for the “UH-60 Blackhawk” helicopter. For speculators, CPI is an opportunity in the equities market.

Chart courtesy of www.StockCharts.com

In my view, I see growing excitement in aerospace stocks in the equities market, especially with the airplane builders and supplier of parts and services and less on the air carriers.

Tags: China, equities market, large-cap stocks, oil prices