Stocks to Play the Recovery in the Business Jet Market

It's no secret that the commercial aerospace market has been very strong in recent years, with Boeing and Airbus continuing to build up large backlogs, but one sub-segment has been far slower to recover from the recession: the business jet market. However, it looks as though it's hit bottom, and it could be set to grow in future. Companies like General Dynamics (NYSE: GD  ) , Bombardier (TSX: BBD.B  ) , Ametek (NYSE: AME  ) , and Textron (NYSE: TXT  ) are worth considering in order to play this theme, and Fools should start looking more closely at these companies.

Is the business jet market recovering?
Industry data and historical relationships suggest that the answer to this question should be in the positive. The business jet market has always been super-cyclical, as corporate spending on them tends to lag corporate profitability. However, in the last few years, corporations have been highly reluctant to open the spending floodgates. Indeed, they continue to take a "cautiously optimistic" approach in the light of a moderately growing economy.

The good news is that, according to a Bloomberg research report, the downtrend in business jet deliveries looks to have bottomed, and with corporate profits on the rise, it's reasonable to expect some growth from here.

Source: Bloomberg

A tale of two business jet markets
However, the composition of that growth is far harder to predict. A closer look at the makeup of business jet deliveries by type reveals that large business jets have significantly outperformed mid- and light-sized jets in recent years.

Source: Bloomberg

One of the biggest winners from this trend is General Dynamics's Gulfstream. Its newest planes are the ultra-large-cabin G650 business jet, and the super-mid-size G280, and General Dynamics's decision to invest in the large end of the market has paid off. In particular, the G650 has spurred profitability so much that its aerospace segment (Gulfstream) has been the largest profit generator for the company in the last two years.

Source: General Dynamics presentations.

At the other end of the market, Textron's Cessna tends to make light- and mid-size business jets, and its performance has been lackluster at best. In fact, Textron's Cessna saw sales decline from $2.2 billion in 2011 to $1.9 billion in 2013. The question is: Which end of the market will do relatively better in the future?

Where next for the industry?
Ultimately, a combination of macro-economic drivers and a willingness from corporations to start spending again on discretionary items like business jets will decide. However, companies like Textron (Cessna), Bombardier, and Embraer are making upgrades to various mid-cabin models in the next few years. The hope is that this will spur new investment in smaller sized jets at a time when corporations are flush with cash.

Manufacturer 2014 2015
Bombardier Learjet 85/Challenger35  
Textron (Cessna) Citation Sovereign/M2 Citation Latitude
Embraer Legacy 500 Legacy 400
Dassault Aviation Falcon2000LSX  

Source: Bloomberg.

All of these planes are mid-cabin sized aircraft, and Textron investors will hope that the market comes back. One positive sign is that pricing in the used market appears to have firmed -- creating the expectation that Textron can take pricing on the new models -- with Textron's management explaining that they "feel good about the fact that pricing has firmed in the use market." And that they "feel good about the fact that pricing is incrementally better in the new market as well." 

More positive commentary came from a key supplier to the business jet market, industrial company Ametek, whose management recently discussed how OEM build rates and the production ramp in various business and regional jet platforms "support really good commercial sales." Morever, Ametek's CEO, Frank Hermance, also suggested that the company's guidance for mid single-digit growth in its EIG Aerosapace unit "may very well be conservative."

Turning to the large-cabin market, in 2016 and 2017, Bombardier's Global 7000 and 8000 high-end business jets will enter into service, and it's possible orders for these planes could put pricing pressure on Gulfstream's G650. Moreover, the high-end mid-cabin planes in the table above could also act as competition.

The bottom line
Given an ongoing global recovery, it's reasonable to expect some cyclical growth for the business jet market. General Dynamics (Gulfstream) has been the clear winner in recent years, but competition is coming. Bombardier is an option, but it's far from being a pure business jet play. Arguably, Textron is the most cyclically exposed to a pick-up in the mid-cabin sized market, and Fools should watch its commentary on its new planes. Alternatively, a supplier with significant exposure to the business jet market, like Ametek, is well worth a closer look.

Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3012291, ~/Articles/ArticleHandler.aspx, 8/29/2014 6:22:28 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement