Shares of aerospace suppliers fell on Wednesday after Boeing (BA 5.64%) sent out a distress signal concerning the health of the industry. Spirit AeroSystems Holdings (SPR 6.23%), a one-time Boeing subsidiary, and TransDigm Group (TDG 3.84%) were each down nearly 30%, and shares of Heico (HEI 3.46%) and United Technologies (RTX 2.66%) both lost nearly 20% in late morning trading.
We know the COVID-19 coronavirus pandemic has severely crippled airlines, as travel demand has all but evaporated as the outbreak has spread globally. The pandemic is expected to cost global airlines more than $100 billion in lost revenue in 2020, and airlines have responded by cutting flights and bringing down capital expenditures.
Fewer flights mean fewer airplanes are needed, which in the near term will cost aftermarket and spare-part suppliers, and over the long term could eat into demand for new Boeing and Airbus jets.
Boeing sounded the alarm late Tuesday, seeking $60 billion in government support including loan guarantees to try to prop up the industry. The aerospace giant said it would use the funds to support its supply chain, including payments to key suppliers to help them keep workers on the payroll.
Spirit is falling more than most because it is the most reliant on Boeing as the maker of the fuselage for the 737 Max and other airplanes. TransDigm and Heico both boast more defense exposure and are better diversified than Spirit, but still rely on commercial aerospace new and spare part sales for significant revenue. United Technologies, through its Pratt & Whitney subsidiary, makes the engines that power many of the jets in the sky.
With Wednesday's declines, shares of Spirit are now down more than 75% year to date, and shares Heico, TransDigm, and United Technologies have each lost more than 48% of their value so far in 2020.
The situation for airlines and their suppliers is dire, and if nothing else, the near-term impact is going to be substantial. At least some of these stocks are very likely oversold, but until there is more clarity about the long-term impact of the pandemic on travel, it could be hard for the markets to find a bottom.
There isn't much reason to rush in and buy any of these stocks right now, but for investors with a long-term mindset, the sell-off has likely created some opportunities.
Despite the decline, TransDigm remains the first stock I'd recommend to anyone seeking commercial aerospace exposure. Heico is also a solid operator. United Technologies is (presumably) still on track to close its megamerger with Raytheon in the first half of this year, which will add a large defense business and help it to better diversify.
In its statement requesting government assistance, Boeing said, "the long-term outlook for the industry is still strong." I agree, and if so, there are opportunities in these declines. But until we know more, the emphasis is on long term.