Aviation Industry Gearing Up For An Aftermarket Supercycle, Says Analyst

William Blair analyst Louie DiPalma has initiated coverage of the shares of Boeing Company BA, Transdigm Group Incorporated TDG, and Heico Corporation HEI. The analyst reiterated an Outperform rating on the shares of VSE Corporation VSEC.

According to the analyst, depressed aircraft production for the past three years, combined with revenge travel, will result in an aftermarket supercycle for the next decade.

Boeing (Initiated at Outperform): Boeing is one of the two largest commercial aircraft manufacturers in the world, supplying a global fleet of more than 10,000 jetliners.

Boeing and Airbus collectively generate over $70 billion in annual commercial aircraft revenue, operating in a duopoly market, noted the analyst.

The analyst expects Chinese airlines to soon resume purchases of Boeing B737 MAX for the first time since 2017.

Related: Boeing's Chinese Comeback: Aviation Giant Invited To Expand In China Amid 737 Max Sales Talks

Two fatal crashes in 2019 and the recent issues involving 787 bulkhead and stabilizer complications have resulted in multiple production halts, delays, groundings, and delivery slowdowns.

As the global aftermarket industry grows at an outsized pace as a result of an aging fleet and a major resurgence of air travel, Boeing's aviation aftermarket business opens numerous opportunities to drive top- and bottom-line growth, writes the analyst.

TransDigm Group - (Initiated at Outperform): The analyst sees greater than 20% upside as TransDigm returns to its historical average premium valuation relative to the S&P 500.

According to the analyst, TransDigm has consistently generated private-equity-like shareholder returns by leveraging its high-margin proprietary product portfolio, effectively using leverage, and successfully deploying capital for accretive M&A activity.

Coming out of the pandemic, TransDigm has taken advantage of the slowdown in new aircraft deliveries and aging aircraft fleets, which have increasing needs for reliable replacement parts, noted the analyst.

Heico (Initiated at Outperform): The analyst sees upside of at least 21% as Heico returns to its average premium valuation to the overall market and its peer set.

Heico has consistently generated positive returns for its shareholders as its primary proprietary method of reverse engineering high-demand aircraft components enables its customers to purchase desired products at a lower cost compared with other sellers, specified the analyst.

The company's method of creating FAA-PMA parts has differentiated its capabilities and portfolio to service the ever-growing aviation aftermarket.

The analyst views the recovery in commercial aerospace in the post-COVID-19 pandemic environment to be a significant tailwind that will support Heico's growth.

Also Read: Ireland-Based Lessor Avolon's Sky-High Move: Places 140 Aircraft Order With Airbus And Boeing

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