Aerospace Theme

82.5% average return by this timely theme

We love the aerospace theme. In fact, 4 of the 97 stocks in our MS Microcap Quality Index (MSMqi) participate in the aerospace industry.

$HERXF $HRX.TO , a Canadian manufacturer of landing gear components & systems, was just acquired at a 71% premium from when we added it to the MSMqi in March 2024. You can see that Cliff Note here.

Two other aerospace MSMqi holdings are up 48% & 129%, respectively.

The fourth of these aerospace companies in the MSMqi is TATT, up 82% since the stock was added to the MSMqi in December 2023.

So far, these four aerospace index inclusions have averaged a return of 82.5%.

Our December research Cliff Note on TATT can be seen here.

We predict TATT will be the 34th stock to reach at least 100% in our MSMqi and that it will eventually comfortably surpass 100% over the next few months.

The company sells thermal management solutions and services, Auxiliary Power Units (APU) (think mini generators) maintenance services and landing gear maintenance.

“Thermal systems are responsible for making sure that cabin and cockpit temperatures are constantly regulated, resulting in cost-saving advantages over time. They also ensure that electronics operate at the correct temperatures in other locations throughout the aircraft. Heat transfer solutions facilitate the exchange of heat created through the operation of these systems by transmitting the heat from a hot medium (air, oil or other fluids) to a cold medium for disposal.”

On Wednesday after the market close, the company reported extremely strong 2024 second-quarter financial results.

Earnings per share rose 67% to 25 cents on a 36% increase in revenue to $37 million, as a new business model focusing on long-term contracts & repeatable revenue is gaining momentum. In a nutshell, the TATT business has become a more predictable & higher-margin operation.

Investors rewarded the company with a one-day 15% increase in its stock price on the day it released earnings.

Why So Bullish?

The aerospace industry has an easy 10-year runway for growth, resulting from undercapacity during COVID.

As you can imagine, travel restrictions during COVID and the underlying uncertainty of when global lockdowns and travel restrictions would be lifted resulted in a severe slowdown in order flow in the aerospace industry, mainly in the commercials sector.

Now, in order to get back on track with the growth plans, major airplane manufacturers like Boeing and Airbus are significantly increasing their production plans.

For example, Airbus is expected to increase its annual production rate by 100% over the next few years (1000 per year), and Boeing is expected to increase its production rate by about 40% (700 per year). The backlog of orders for both of these companies will take over ten years to satisfy. Bell Helicopter reported a 31% revenue growth in 2023 and is projecting nearly 10% growth for 2024.

According to Boeing's projections, the global aviation industry is expected to require a total of 41,170 new airplanes over the next 20 years in order to meet growing demand and improve the global fleet’s fuel efficiency. Single aisle aircraft are estimated to account for approximately 75% of this total, while widebody aircraft are projected to represent around 18%.”

Another growth driver was also fueled by the pandemic for the capital-intensive aerospace industry, as well as for most industries.

The pandemic-induced inflation and higher interest rates to combat inflation have forced companies to adjust their business models to become more profitable and more efficient. This was accomplished by raising prices and slashing expenses. This alone, is a very positive long-term setup that happens every so often when exiting severe negative economic disruptions.

So, for the aerospace industry, a positive effect of the post-COVID double whammy occurred.

You had higher demand for companies providing products and services to the aerospace industry at the same time as their balance sheets were becoming healthier and income statements were turning more profitable.

Looking For More Aerospace Stocks

Based on our success in the aerospace industry, we are actively looking for some more aerospace stocks to add to the MSMqi.

A primary focus will be on the defense sector, as opposed to the commercial sector, since these companies will be less sensitive to recessions or slow downs in travel.

We’re looking at one right now that supplies parts for airplanes in the defense industry. It’s a stock I owned over ten years ago and made some nice money on before the company’s fortunes soured. A new CEO and large backlog have us watching the company very closely.