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TWST: Please give us an overview of what you are covering in the
aerospace market.
Mr. Lozier: I cover the five prime defense contractors ' Boeing (BA),
Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN) and
General Dynamics (GD). I also cover Textron (TXT) and the four non-
bankrupt legacy airlines, which helps me to stay on top of the consumer
side of aerospace. Our industrials team covers some smaller aerospace
and defense names like L-3 (LLL), Rockwell Collins (COL), Goodrich (GR),
Harris (HRS) and Moog (MOG.A). So we follow a lot of interesting
businesses out there; the list runs the gamut. TWST: How have these companies done from a business perspective year to
date?
Mr. Lozier: It's helpful to distinguish between commercial aerospace and
defense. The defense industry tends to be countercyclical, and it is
certainly not the free market in which most companies compete. Pentagon
spending varies annually based on changing global threats, and since
these are not correlated with the economy, defense stocks can behave
very differently than the rest of the market. During the first four
months of the year, due to the President's surprisingly aggressive
budget proposal, the defense sector outperformed the S&P by a long shot.
The Spade Defense Index (DXS) was up over 13% through May 10 versus the
S&P 500's 4.3%. Since then, however, many of those defense stocks have
given a lot back, despite solid second-quarter performance from the
sector as a whole. We think investors have grown nervous about the
uncertainty in our country's global commitments and what will come of
defense spending when those engagements draw down. On the other side,
commercial aerospace is the place to be right now for a number of
reasons. The industry cycle is in its expected upturn, but there are
some unusual factors that we haven't seen before. The domestic airline
up cycle is in full swing and airplane orders will follow, but there's
also this global airline boom, with open skies agreements proliferating
and new airlines being started across the globe. These folks need new
airplanes. In addition, while high fuel prices certainly do not help
anyone in the airline business, they can help airplane OEMs and
suppliers to sell more jets. The promise of more fuel-efficient planes
is certainly an attractive one when crude oil is selling for $70 or $75
a barrel. So these guys have mostly done well. There are exceptions.
Bombardier (BBD:TSX) has had their struggles, but we don't cover them.
Neither do we cover Airbus, which, as many know, has made major
strategic and operational missteps. But if you're Boeing, you are pretty
happy right now. I think the same can be said of Embraer (ERJ) and a lot
of the premier suppliers as well.
Tickers included in this excerpt: BA, BBD:TSX, COL, DXS, ERJ, FCS, FLIR, GD, GE, GR, HRS, JTRS, LLL, LMT, MOG.A, NOC, PCP, RTN, RYCEY, TXT
For more information call (212) 952 7433. The
Wall Street Transcript does not endorse any of the comments made by interviewees, and does
not make stock recommendations.
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