Manufacturers feasting on commercial aviation boom
Oct. 20, 2014, Washington, D.C. - A commercial jet manufacturing boom is fueling suppliers' profits, with U.S. corporate results on Friday underscoring strong demand from the aviation industry in a rocky global economy.
The latest earnings may steady investor confidence in manufacturers exposed to the sector, offsetting concern about other markets such as energy as well as general worry about stagnating growth outside the United States.
On Friday, General Electric Co reported a 16 percent profit rise for its aviation unit and a bulging order book of jet engines. Honeywell International’s aerospace revenue beat some analysts’ forecasts, while the division’s profit margins improved.
Shares of Cessna maker Textron Inc soared more than 9 percent after it raised its full-year profit forecast.
“The aerospace segment is the place to be in industrial,” said Charlie Smith, chief investment officer of Fort Pitt Capital, which holds Honeywell and GE shares. “If you’re in the right industries … you’re going to be sort of protected from whatever macro pain is coming from Europe or even China.”
Friday’s results could bode well for other diverse manufacturers with aerospace businesses, such as Parker Hannifin, Eaton Corp and United Technologies, said John Heslin, vice president at Tradition Capital Management, who follows industrial companies.
“While growth will be up and down for the economy, we think a more stable end (market) will be aerospace, which has legs,” Heslin said.
Boeing Co and Airbus forecast demand for air travel will increase about 5 percent a year over the next two decades, in line with historic trends.
Fuel efficient jets being developed have brought the big plane makers an avalanche of orders, boosting their backlogs to more than $700 billion combined, or about eight years worth of production.
The demand is cascading down the supply chain to companies like Honeywell and GE that build key components such as avionics and engines. Boeing and Airbus now buy about two-thirds of the planes’ content from suppliers rather than building it themselves.
“The data on aerospace remains strong,” said Scott Lawson, vice president of Westwood Holdings Group. “It’s one of the segments best positioned for a modest dip in the economy, or for growth if there is no dip.”
Equipment orders jumped 35 percent at GE’s aviation division to $6.8 billion in the third quarter. The conglomerate’s GE9X engine for Boeing’s new 777X airplane helped drive the order book, GE Chief Financial Officer Jeff Bornstein said.
“We’re enjoying a lot of the cyclical upturn that has happened in aerospace,” Bornstein said in an interview.
Honeywell and GE also posted “very strong” demand for spare parts, said Sterne Agee analyst Peter Arment. Such “aftermarket” revenue is generally more lucrative than sales of original equipment.
“It just shows you that global utilization rates for aircraft remain very healthy,” Arment said.