Aerospace Industry Revival Favors These Two Stocks, Analysts Highlight Upswing Potential

Stifel analyst Bert W. Subin initiated coverage on six companies in the commercial aerospace industry: Boeing Co BA with a price target of $265, Transdigm Group Inc TDG with a price target of $1,000, Spirit Aerosystems Holdings, Inc SPR with a price target of $28, Hexcel Corp HXL with a price target of $83, Heico Corp HEI with a price target of $200 and AAR Corp AIR with a price target of $80. 

Subin initiated coverage with a Buy rating on BA, HXL, HEI, and AIR and a Hold rating on TDG and SPR. 

Boeing and its suppliers see the most upside as aftermarket growth should start to slow.

The analyst noted that new aircraft production now has a greater likelihood of improving than getting worse, making him favor OEMs and suppliers as profitability and FCF generation march back toward pre-pandemic levels. 

Conversely, companies with higher aftermarket exposure tend to perform best early in the cycle, as used aircraft run harder and demand for parts and services spikes. 

Given that the post-pandemic recovery is stabilizing, he noted commercial aero is becoming mid-cycle, and mid-cycle tends to be characterized by rising aircraft production, which benefits OEMs and suppliers while reducing pricing power for aftermarket. His top picks are Boeing and Hexcel.

Boeing is on track to see build rates improve, which, when paired with BGS strength and modest BDS improvement, should position the company to see material Free Cash Flow growth over the next 2+ years that will drive upside for shares as demand for new aircraft remains very high.

Hexcel is generally overweight to Airbus and widebodies but has diverse exposure across commercial aero (Airbus, Boeing, regional jets), business jets, and significant defense programs. 

Given the resurgence in international travel, the company stands to benefit most.

TransDigm’s historic success is undeniable, but higher interest rates and a mix shift toward OEM sales will moderate the upside, given already high expectations for growth. 

Spirit’s recent MoA with Boeing and changes to the capital structure are helping to reduce concerns about 2025 debt maturities. 

Aftermarket demand will likely remain strong in 2024 before slowing in 2025, and HEICO probably has the most upside to pricing, having not raised prices at the same level as OEMs in 2022-2023. That should drive margin, earnings, and FCF upside in 2024-25.

AAR stands to benefit from continued strength in aftermarket services demand that compliments growth in new product distribution.