Back to top

Investment Ideas

Just a few months ago, commercial air traffic was weak, and there was nothing to suggest that demand would increase anytime soon.

With fewer people traveling, there was no need for airlines to order new planes. Many companies canceled or deferred new plane orders. As a result, most airline industry experts were anticipating decreases in the production of new aircraft.

Positive News from Boeing and Airbus

In recent weeks, however, Boeing (BA - Analyst Report) and Airbus did not announce production cuts, as many in the industry feared. Instead, both Boeing and Airbus announced plans to increase production rates.

On March 15, Airbus said that it was going to increase its monthly production of A320 aircraft from 34 to 36 beginning in December 2010. And last week, Boeing announced that it was going to raise production levels of its 747 and 777 aircraft sooner than expected. The company indicated that the demand for planes was growing.

Improving Industry Conditions

As the economic recovery takes hold, passenger traffic levels are rebounding faster than expected. This has the entire commercial aerospace industry feeling more optimistic about the future.

While these scheduled production increases won't take place for months or years down the road, the important point is that analysts were forecasting flat-to-lower production levels. Thus, the announced production increases will prompt analysts to raise their estimates for 2011 and beyond, and those estimate increases are not yet reflected aerospace stock prices.

Here are a few ways to play the improving conditions in the aerospace industry.

Ladish (LDSH) engineers, produces and markets high-strength, high-technology forged and cast metal components for a wide variety of load-bearing and fatigue-resisting applications in the jet engine, aerospace and industrial markets.

In the last two months, the Zacks Consensus Estimate for 2010 has increased by 13 cents, and the Zacks Consensus Estimate for 2011 is up 8 cents. Analysts are forecasting earnings growth of 61.4% in 2010 and 48.5% in 2011.

LDSH shares are trading at 31x consensus estimates for 2010 and 21x consensus estimates for 2011. Given the robust earnings growth expected over the next two years, LDSH shares are trading at a reasonable P/E multiple.

In addition, Ladish has a lean balance sheet. Its debt/equity ratio is 0.4%, well below the industry average of 29.4%.

Ladish is a Zacks #1 Rank stock.

Heico Corporation (HEI - Snapshot Report) sells to certain niche segments of the aviation, defense, space and electronics industries. HEICO's customers include a majority of the world's airlines, defense contractors and military agencies.

In the last two months, the 2010 Zacks Consensus Estimate has moved 4 cents higher, and the 2011 Zacks Consensus Estimate has moved up 6 cents. Analysts are forecasting EPS growth of 13.6% in 2010 and 15.9% in 2011.

HEI shares are trading at 28x 2010 consensus EPS estimates and 24x 2011 consensus EPS estimates.

Heico is a Zacks #2 Rank stock. Its balance sheet is nearly debt free with a debt/equity ratio of just 0.1%.

LMI Aerospace (LMIA - Snapshot Report) is a leading fabricator, finisher and integrator of formed, close tolerance aluminum and specialty alloy components for use by the aerospace industry. The company manufactures flaps and lens assemblies, cockpit window frame assemblies and fuselage skins and supports.

Consensus estimates for 2010 have been flat for the last 90 days, while the 2011 estimates are up 8 cents in the last three months.

LMI's expected growth in 2010 and 2011 is 9.0% and 15.3%, respectively. Its stock trades at 13x 2010 EPS estimates and 11x 2011 EPS estimates.

LMI's healthy balance sheet has debt-to-equity ratio of 0.1%.

LMI Aerospace is a Zacks #2 Rank stock.

BE Aerospace (BEAV - Snapshot Report) is the world's leading manufacturer of aircraft cabin interior products, serving virtually all the world's airlines and aircraft manufacturers.

BEAV has beaten the Zacks Consensus Estimate in the last five quarters by an average of 13.4%.

Analysts covering the stock have left their EPS estimates for 2010 and 2011 essentially unchanged in the last 90 days. They are forecasting EPS growth of 1% in 2010 and 25% in 2011, which makes its 2011 P/E multiple of 16x look attractive.

As with the rest of our aerospace picks, BE Aerospace has a low debt/equity of 0.7%.

BE Aerospace is a Zacks #3 Rank stock.

Please login to Zacks.com or register to post a comment.