July 28, 2021


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2 Red-Hot Stock Picks for Aerospace Investors – The Motley Fool

Enterprise air visitors is coming again, However It is solely Extra probably to be in 2023 that worl.......

Enterprise air visitors is coming again, However It is solely Extra probably to be in 2023 that worldwide flight departures attain 2019 ranges. You will Have The power to study that assertion in two methods. The glass-half-empty view is thOn the Industry has taken a extreme hit, whereas the glass-half-full strategy sees it as an Industry on the cusp of multi-yr progress. I choose to take the latter view — and with that in thoughts, This is a Take A look at why aerospace huge Raytheon Utilized sciences (NYSE:RTX) and flight simulator and teaching agency CAE (NYSE:CAE) are worth a Search for aerospace buyers.

Raytheon Utilized sciences

The agency was created out of a merger between the protection-heavy Raytheon Company and aerospace companies Pratt & Whitney and Collins Aerospace of The earlier United Utilized sciences. Sadly, the merger Occurred On the worst potential second Inside the COVID-19 pandemic (April 2020). Investors in Raytheon Company Ought to have apprehensive about whOn That they had gotten into by merging with their commercial-aerospace-focused companion.

Picture supply: Getty Pictures.

However, that was then, And that is now. As you can see under, worldwide commercial air flights are rising strongly from 2020, and although They’re nonetheless under 2019 ranges, Industry observers anticipate yr-over-yr progress till 2019 ranges are exceeded in 2023.

As such, Raytheon Utilized sciences buyers can anticipate A sharp restoration in commercial aerospace as plane engines want servicing as quickly as more (Pratt & Whitney) and airplane manufacturing and aftime periodarket providers decide up (Collins Aerospace). Meanwhereas, Raytheon’s protection-focused companies will current strong assist in earnings and free money circulate (FCF). 

Data supply: radarbox.com. Chart by author.

Raytheon’s CEO Greg Hayes sees the agency’s FCF recovering from $2.5 billion Inside the pandemic-hit yr of 2020 to Greater than $5 billion (excluding merger investments) in 2021, and finally to the $8 billion to $9 billion talked about On the time of the merger. Wall Road analysts have pegged Raytheon at $7.7 billion in FCF in 2023, And since the aftime periodarket kicks in, there Ought to be An prolonged runway to progress forward.

If Raytheon hits analyst targets for FCF, then — based mostly on its current market cap — It’s going to commerce at 16.8 occasions FCF in 2023. That is An excellent valuation For An group set for prolonged-time period earnings progress from the aviation Industry. Given Raytheon’s broad publicity to the Industry — from plane engines to buildings, avionics, cabins, and seating — It is In all probability The biggest methods to play the sector.


Investing in a flight simulator and pilot teaching agency might Appear to be A troublesome name, however bear with me. There was a pilot scarcity earlier than the pandemic hit, and airways have been retiring older pilots whereas holding again on teaching new ones, so It is not exhausting to see thOn the demand for pilots might exceed current in A pair of yrs as flights Get back.

Which Could Even be good information for CAE — and It is Almost the state of affairs that administration envisages. As a Outcome of of furloughs imposed on the Industry, many pilots have switched to various careers, and obligatory age-based mostly retirement stays A drawback Inside the Industry. As such, CAE sees demand for 27 thousand new pilots in 2021 alone. On a more prolonged-time period basis, CAE’s pilot demand outlook names for 167 thousand alternative pilots by 2029, with An further 97 thousand required for progress. In completely different phrases, 264 thousand new pilots Shall be wanted by 2029. Meanwhereas, CAE has An alternative To revenue from The Need to retrain pilots as they put together to reenter service.

Picture supply: Getty Pictures.

CAE Did not stand nonetheless By way of the pandemic, both — it inked provides To buy An factor of Textron’s simulation and teaching Industry for $40 million, and introduced an settlement in March 2021 To buy L3Harris‘ army teaching Industry for $1.05 billion. The acquisitions will strengthen CAE’s army teaching companies and further constrongate its main place in pilot teaching. 

Furthermore, CAE has An prolonged-time period margin enlargement alternative, Benefiting from its main place in simulators by rising its higher-margin teaching income. 

Placing All of it collectively, Wall Road analysts have CAE’s earnings and money circulate bouncing again strongly from the trough in its fiscal 2021. The agency is forecast to commerce at round 21 occasions its FCF in March 2024, when worldwide commercial flights Ought to be above The peak in 2019. That is An Low price valuation for a Industry with strong prolonged-time period prospects. 

This textual content material recurrents the opinion of The author, who might disagree with the “official” suggestion place of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even Definitely one of our personal — assists us all assume critinamey about investing and make selections that assist us Discover your self to be smarter, happier, and richer.