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Two Aircraft Supply Stocks for 2010: Curtiss-Wright (CW) and Hexcel (HXL)

September 14, 2010 | About:
David Merkel

Penny Sleuth

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Earlier this week, I hopped on a train to NYC to check out Gabelli’s 16th Annual Aircraft Supplier Conference. I find these conferences are a great way to learn a lot about the leading companies in an industry in a short amount of time. Among the 14 companies presenting were some industry heavies such as Honeywell and the luncheon presenter, Boeing.

But more interesting were two tiny stocks that I want to tell you about today…

I have a favorable view of aircraft suppliers in general. And I think this is a good spot to drop some lines and fish for winners.

There are many reasons I think this way. Most of them have to do with growth trends that have been in place for a long time and show no sign of letup. Since 1977, for instance, revenue passenger miles have grown about 5% per year. RPM is an industry measure of air traffic. It is simply the number paying passengers times miles flown.

After dipping last year, RPM is on the march again. In fact, it seems to be making up for lost time, as this next chart shows. (Note that the drop in April was due to the volcano in Iceland, which scuttled air travel all over Europe.)

091410Sleuth1.png

More passengers and more miles mean more planes. That’s the simplest reason to like aircraft parts suppliers. Secondarily, the industry retires hundreds of planes every year. And there is renewed demand for more fuel-efficient aircraft.

Put it all in a pot and you understand why the backlogs of Boeing and Airbus for new aircraft are very healthy. Over the next several years, these two will deliver more than 1,000 new planes per year. This next chart shows how these cycles have gone since Denny McLain won 31 games for the Detroit Tigers in ’68.

091410Sleuth2.png

Looking out over the next 20 years, the industry will need more than 30,000 new planes. That’s about $3.6 trillion in new business for the aircraft industry. This next chart shows you how you get to 30,000 planes.

091410Sleuth3.png

The main driver of all this, though, are the billions of new consumers from emerging markets. Listening to these companies made that very clear. All the big growth is coming from the emerging markets, in particular the Asia-Pacific region. This next chart is from Boeing’s presentation:

091410Sleuth4.png

The top-growing markets with over 7% annual growth include the Asia-Pacific region as well as flights within China and Latin America and flights linking the Middle East to Asia-Pacific.

So that’s a big-picture view of why I like the industry. As to particular ideas, I’m looking over a couple that happen to be small-cap plays: Curtiss-Wright (CW) and Hexcel (HXL).

While Curtiss-Wright is a stock I’ve followed for some time, Hexcel is a new name to me. It’s also an intriguing story…

Let’s start with Curtiss-Wright. The company goes back 80 years when companies created by Glenn Curtiss and the Wright Brothers merged. Lots of people know the Wright Brothers’ story, but not so much Glen Curtiss. He was a brilliant inventor who brought many innovations to flying.

Curtiss-Wright makes many mission-critical systems for aircraft. It also makes pumps, valves and motors for submarines, aircraft carriers and more. Finally, the company has a good nuclear business in which it makes parts for reactors. In this, Curtiss-Wright is a kind of picks-and-shovels play on the nuclear renaissance.

The company has been growing rapidly of late. Sales have grown 20%-plus over the last five years. Curtiss-Wright is a reasonably priced industrial, at only 14 times trailing earnings and about 11 times next year’s guess.

Then, there’s Hexcel, which is a name I’ve not followed before and may be the best of the two. Hexcel makes advanced composites made of carbon fibers and glass that make an aircraft lighter, stronger and faster. The company also uses this know-how to make components for the wind power industry.

Hexcel had been growing 10-15% per year before 2009. But earnings should grow 20%-plus this year. These composites are popular given the demands for more fuel-efficient aircraft. The new planes have 10 times the composites of older aircraft. And the wind power business is a growth area, too.

The story doesn’t seem to be much of a secret, though. Hexcel’s shares trade for 18 times next year’s earnings per share guess. But it’s one to watch, and perhaps we’ll pick it up on a dip.

That’s the scoop from Gabelli’s conference. I’ll keep an eye on how things unfold and pick up new opportunities on the cheap as the market gives us a chance. And yes, that goose is still laying golden eggs.

Sincerely,

Chris Mayer

Penny Sleuth

September 14, 2010

About the author:

Penny Sleuth
David J. Merkel, FSA, CFA, is the Chief Economist and Director of Research of Finacorp Securities. His specialty is looking at the interlinkages in the markets in order to understand individual markets better. He holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth.

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