Stock selection will become key in the commercial aerospace sector, says Kenneth Herbert, Senior Vice President of Equity Research at Wedbush Securities. He is positive on the sector overall, but says those looking at the sector should be aware of concerns regarding availability of financing, labor issues and a macro slowdown in air travel.
“Both Boeing and Airbus have announced significant rate increases, up to 30% to 40%, on most of the aircraft over the next two to three years, and I fully expect those rate increases to continue to flow through, which is very good news for the supply chain and the original equipment manufacturers, OEMs,” Herbert said.
Herbert recommends Triumph Group (TGI), a small-cap name with leverage to the commercial cycle, both aftermarket and the original equipment build cycle. He also says TGI last year acquired Vought Aircraft, and they are still in the early stages of recognizing synergies and cost-savings opportunities.
“You are seeing nice earnings growth, going from this year of approximately $4.50 up to about $7 in peak earnings by fiscal 2015. A significant part of that certainly is coming from the volume increases and lean and productivity initiatives, but also benefits of the acquisition, which are flowing through at a rate of about $0.20 to $0.25 a year,” Herbert said.