If you are basing your investment decision on how far these two aerospace companies have come in the last year, then there is one clear winner. Over the last year, Heico's (NYSE:HEI) 51% stock price rise has outperformed Boeing (NYSE:BA) by 62%, and the S&P 500 index by some 27%. However, the stock market rarely looks backwards, and the key is to try and visualize what the two companies might look like in a year's time. In this context, there's a strong case for favoring Boeing over Heico. Let's take a look at it.

Three things to consider

Let's organize the discussion as follows:

  • The 737 MAX debacle and the question of when it will return to service (RTS).
  • Underlying demand in the commercial aviation aftermarket and its connection to commercial passenger growth in 2020.
  • Valuation.

All three factors are relevant to both companies.

A plane taking off from a strip with "2020" written on it.

Image source: Getty Images.

The 737 MAX question

Without even considering the emotional issue of the loss of life from the Lion Air and Ethiopian Airlines crashes, it's been a painful year for Boeing shareholders. Plane crashes are the result of a chain of events, and the Maneuvering Characteristics Augmentation System (MCAS) on the Boeing 737 MAX is only part of the explanation. In a nutshell, faulty data from an erroneous angle of attack (AOA) sensor reading repeatedly triggered MCAS to lower the nose, and pilots were unable to deal with the situation.

This is not the place to point the finger of blame; suffice it to note that Boeing has been working on a series of additional layers of protection for MCAS in order to deal with its part of the responsibility, and the Federal Aviation Administration (FAA) is in the process of determining whether the 737 MAX is safe enough to RTS.

Unfortunately, the RTS hasn't happened yet, even though former Boeing CEO Dennis Muilenburg believed it would be possible by the end of October 2019. All that said, it still looks likely that the RTS will occur at some point in 2020, and Boeing's prospects are likely to look a lot better after it takes place.

The same might not necessarily be the case for Heico. It's hard to quantify just how much extra commercial aerospace aftermarket demand is being created by the absence of the 737 MAX. An RTS is likely to lead to upside potential for Boeing, and possibly downside for Heico.

Aftermarket demand and commercial passenger growth

Last year was a super year for the commercial aerospace aftermarket, from smaller companies like Heico through aviation giants like United Technologies, General Electric, and Honeywell. That came as some surprise -- according to the International Air Transport Association, passenger growth (measured in revenue passenger kilometers) slowed to 4.2% -- its lowest growth rate since the last recession.

The question is this: Can the commercial aftermarket continue to grow at a double-digit rate when passenger growth is slowing to around 4%? History suggests the answer is no. That's not great news for Heico, but it might not be so bad for Boeing because its key earnings driver will be the RTS of the 737 MAX and ramping production of the airplane thereafter.

Global growth and airline passenger growth.

Data source: International Air Transport Association.

Valuations still matter

The timing of the pivotal RTS of the 737 MAX is very hard to predict, which makes predicting earnings and cash flow for Boeing very difficult in 2020 -- the company gets paid when it delivers airplanes. It's a point that helps highlight how important the event is for Boeing. However, we do know that Boeing's other segments, namely global services and defense, space & security, are performing very well.

Consequently, analyst estimates are for a strong bounce back in earnings and cash flow in 2020. Consensus EPS estimates of $15.16 put Boeing on a 2020 PE ratio of 21 times earnings. Given that the 737 MAX won't have a full year of production until 2021, that valuation looks like a good value.

It's harder to make the same case for Heico. On any measure the stock isn't cheap anymore, and the market may be taking an overly positive view of its prospects.

HEI Price to Free Cash Flow Chart

HEI Price to Free Cash Flow data by YCharts

Boeing or Heico?

There's risk in both stocks, but on a risk/reward basis Boeing is probably a better value. Given Heico's valuation it's hard to see significant upside, and the commercial aviation aftermarket could disappoint in 2020 with passenger growth slowing.

Boeing certainly has downside risk too -- a failure to get an RTS of the 737 MAX would be a catastrophe -- so risk-averse investors may want to avoid the stock until the 737 MAX gets back in service. However, for more aggressive investors Boeing's potential upside makes it look like a good value.