A few months ago, I hopped on a train to NYC to check out Gabelli’s 16th Annual Aircraft Supplier Conference. I find these conferences are a great way to learn a lot about the leading companies in an industry in a short amount of time. Among the 14 companies presenting were some industry heavyweights like Honeywell and Boeing.
I have a favorable view of aircraft suppliers in general. And I think this may be a good spot to drop some lines and fish for winners. There are many reasons for my optimism. For starters, the long-term growth trends of air traffic show no signs of slowing down. Since 1977, revenue passenger miles (RPMs) have grown about 5% per year. RPM is an industry measure of air traffic. It is simply the number of paying passengers, times miles flown.
After dipping during the 2008-09 crisis, RPM is on the march again. In fact, it seems to be making up for lost time. More passengers and more miles mean more planes. That’s the simplest reason to like aircraft parts suppliers. Secondarily, the industry retires hundreds of planes every year. And there is renewed demand for more fuel-efficient aircraft.
Put it all in a pot and you understand why the backlogs of Boeing and Airbus for new aircraft are very healthy. Over the next several years, these two companies are on pace to deliver more than 1,000 new planes per year. Looking out over the next 20 years, the airline industry as a whole will need more than 30,000 new planes. That’s about $3.6 trillion in new business for the aircraft industry.
The main drivers of all this growth, though, are the billions of new consumers from emerging markets, in particular the Asia-Pacific region. Boeing expects air traffic in the Asia-Pacific region to grow more than 7% per year over the next two decades.
So that’s a big-picture view of why I like the industry. As to particular ideas, I’m looking over a bunch: Parker Hannifin, Curtiss-Wright and Hexcel. To be clear, I have not recommended any of these stocks to my subscribers. But I am keeping a close eye on them.
Let’s start with Parker Hannifin (NYSE:PH). It is more of a conglomerate than a pure play on aerospace. Only 18% of sales come from aerospace, but it does so many important things it’s worth talking about. As the senior vice president put it at the Gabelli Conference, “Parker Hannifin is uniquely positioned to address the challenges of mankind.” He then ticked off a list of things including food, water, energy and more. PH essentially makes components to control fluids, hence its broad applicability to everything from water to the fluids of an aircraft.
PH gets more than half of its business from overseas markets. It also gets half of its revenues from aftermarket sales – for things like parts and service. These are stable sources of high-margin business. I like businesses like this.
PH is an old American workhorse whose track record I admire. The company began in 1918 when 33-year-old engineer Arthur Parker rented a loft in Cleveland to develop his unique braking system for trucks and buses. From that humble beginning, PH is a $10 billion business today.
At the conference, PH handed out a pamphlet that showed about a dozen different stats – things likes sales, profits, employees, book value, debt to equity – going all the way back to 1945. Those stats had me floored. You could read a chunk of the history of the nation in these fluctuating numbers, like the width of tree rings serve as a record of the fat years and the lean.
PH has boosted its dividend for 54 years. It has a long track record of steady cash flows. At $87 per share, it trades for about 15 times its 2011 earnings estimate. Analysts are looking for a plump 17% jump in earnings in 2012. International sales account for nearly half the company’s revenue, thereby providing a nice built-in hedge against future dollar weakness. It’s a good company and we may get involved at some point.
Another old American hand I like is Curtiss-Wright (NYSE:CW). The company goes back 80 years when companies created by Glenn Curtiss and the Wright Brothers merged. Lots of people know the Wright Brothers’ story, but Glen Curtiss’ story is less well known. He was a brilliant inventor who brought many innovations to flying.
Curtiss-Wright makes many mission-critical systems for aircraft. It also makes pumps, valves and motors for submarines, aircraft carriers and more. Finally, the company has a good nuclear business in which it makes parts for reactors. In this, Curtiss-Wright is a kind of picks-and-shovels play on the nuclear power.
The company has been growing rapidly of late. Sales have grown 20%-plus over the last five years. Like PH, Curtiss-Wright is another reasonably priced industrial. At the current quote of $33.35, the stock sells for less than 14 times trailing earnings and about 11 times next year’s guess.
Finally, there is Hexcel, which trades on the NYSE under the ticker HXL. Hexcel makes advanced composites made of carbon fibers and glass that make an aircraft lighter, stronger and faster. The company also uses this know-how to make components for the wind power industry.
Hexcel has been growing about 10-15% per year for the last few years. But earnings should grow 20%-plus this year. Hexcel’s composites are popular, given the demands for more fuel-efficient aircraft. The new planes have 10 times the composites of older aircraft. And the wind power business is a growth area, too.
The story doesn’t seem to be much of a secret, though. Hexcel’s shares trade for 16 times next year’s earnings per share guess. But it’s one to watch. I’ll be keeping a close eye on this sector.
Chris Mayer,for The Daily Reckoning
Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.
I do not think this trend is unstoppable.
High oil prices will stop it easily.
the unstoppable trend will be the use of bicycles.
Any thoughts on TIE?
In the long run, High Oil Prices are the
best thing for this country. Sure in the
short term it sucks paying $4.00 for gas.
However, with high oil prices more
non traditional (renewables etc.) sources of energy come online. Best of all, hundreds of areas that were deemed unprofitable are drilled.
And guess what? in 6 years the world has a glut of oil and OPEC has no control, even if it added new members.
"There are two sides to every coin," as the saying goes. And nowhere is that phrase more apt than in matters of money, especially as regards the U.S. Federal Reserve. Today, Mark Spitznagel squares off against none other than Paul Krugman to discuss that very topic. What follows is sublime entertainment. Read on...
As long as markets exist, there will people who try to predict where they are headed. Of course, no one can know for sure. And as Greg Guenthner explains, their prognostications can sometimes do more harm than good. Read on...
A massive storm recently blanketed the U.S. northeast. And as it did, most people ran to their thermostats to keep warm. But staying warm and cozy this winter comes at a price, even with the U.S. nat gas boom in full swing. Today, Matt Insley explains why, when it comes to nat gas prices, seasonality definitely matters. Read on...
Like it or not, size does matter. But contrary to a popular saying, bigger is not always better. Especially when it comes to the size of the state. Marc Faber explains why a world of smaller states might function better than one dominated by excessively large "superpowers." Read on...
Pope Francis recently warned people to beware the "tyranny" of capitalism. Hmmm... Would that be true capitalism and trust in free enterprise? Or the crony capitalism we're currently saddled with? Bill Bonner explains why, even though capitalism is easily corrupted by the capitalists, that doesn't necessarily mean it is a bum creed. Read on...
The average postwar U.S. expansion has lasted 58 months. In the midst of major policy dislocation in Congress and at the Fed, we are at month 52 of the current expansion, which began in June 2009. But we are running out of time – and luck.