Instead of thinking of commercial aviation as a damaged business with high vulnerability to prospective COVID-19 resurgences, it’s more accurate to think of it as a multi-year recovery. Of course, the sector will not rebound in a straight line and investors will have to put up with some bad news. Raytheon Technologies (RTX 2.67%), AAR Corp (AIR 0.15%) and Hexcel (HXL -1.14%) are all good methods to play the rebound.
After outperforming during the epidemic, the defense industry is now facing headwinds from reduced military hardware investments. Furthermore, the fact that defense expenditure remained stable during the epidemic indicates that the defense sector remains at full capacity. As a result, it’s more vulnerable to the global economy’s supply chain problems. When it comes to commercial aviation, both the OEM and aftermarket are expanding but their development is not consistent. In general, the aftermarket is rebounding first, with the OEM following as airlines become more profitable and purchase planes, while Boeing and Airbus ramp up their productions.
Raytheon expects low double-digit growth in its commercial aerospace-focused companies (Pratt & Whitney and Collins Aerospace) for the full year of 2022, compared to low to mid-single digits in its defense-focused businesses. Furthermore, management expects a combined operating profit increase of $1.15 billion to $1.4 billion at Pratt and Collins in 2022, compared to only $150 million to $250 million at the defense-focused firms. Raytheon’s management anticipates that a multi-year rebound in commercial aircrafts will lead to a free cash flow (FCF) of $10 billion by 2025. Given the stock’s present market capitalization of $141 billion, it has a lot of room to grow.
AAR provides both commercial and defence clients with aftermarket parts, maintenance as well as repair and overhaul services, as well as integrated solutions. Sales to commercial clients increased by 33% in the most recent quarter, whereas sales to government and defense customers decreased by 15% in the same timeframe.
On the other hand, Hexcel’s sophisticated composites make it an OEM play, with minimal aftermarket demand for its products. The rationale for purchasing the stock is compelling. Its sophisticated composites are utilized more on current generation planes, notably wide-body planes, to assist with cutting weight and enhancing strength. As a result, Hexcel’s recovery will take longer, as seen by the aforementioned values.
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