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Why Aerospace Stocks Are Rallying Today

By Lou Whiteman - Mar 25, 2020 at 4:01PM

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Washington delivers a package to keep the airlines flying.

What happened

Aerospace stocks took flight on Wednesday after lawmakers in Washington reached a deal on a $2 trillion stimulus package. The bill includes assistance for commercial aerospace suppliers facing a cutback in demand for their products, and -- as importantly -- funds to keep their customers, the airlines, solvent.

Large commercial aerospace suppliers including United Technologies (RTX -2.55%), Heico (HEI -0.33%), and Textron (TXT -1.40%), as well as defense titans such as Lockheed Martin (LMT -2.00%), General Dynamics (GD -3.63%), and Raytheon (RTN), all were up double digits as of 3:30 pm EDT on optimism that the U.S. economy will be able to avoid a deep recession.

So what

Airlines have been among the sectors hardest hit by the COVID-19 coronavirus pandemic, with travel demand evaporating in recent weeks as the virus has spread. Carriers have responded by cutting flights and grounding aircraft, putting pressure on aircraft manufacturers like Boeing and its vast supply chain.

Boeing has requested $60 billion in aid for the aerospace sector, and while details of the stimulus plan were still being finalized as of this writing, reports indicate the package will contain billions in loans designed to help the aerospace giant and its suppliers. The airlines will also get upwards of $50 billion in aid, which should help the sector avoid a wave of bankruptcies.

A view inside an aviation hangar

Image source: Getty Images.

United Technologies and Heico are both major commercial aerospace suppliers, and Raytheon is moving with UTX because the two companies are closing in on completing an all-stock merger. Textron and General Dynamics are two of North America's three largest suppliers of business jets, a market that should hold up better if the U.S. can avoid the worst of a recession.

Lockheed Martin has little commercial business compared to the other companies, but the world's largest defense contractor can ill afford disruptions in the supply chain for its F-35 Joint Strike Fighter and other major weapons programs, and will likely benefit indirectly from the stimulus plan.

Now what

The stimulus, assuming it is signed into law, will help companies to weather the downturn, but it is unlikely to be enough to prevent a downturn. And it will be hard to know for sure how bad the downturn will be, and how much individual companies are affected, until the pandemic is under control and business begins to get back to normal.

In the meantime, investors should take comfort in knowing that all these companies have the wherewithal to weather whatever downturn comes. And with the government signaling its willingness to step in, it's a good time to selectively buy the top companies in the sector.

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Stocks Mentioned

Raytheon Technologies Corporation Stock Quote
Raytheon Technologies Corporation
RTX
$90.25 (-2.55%) $-2.36
Textron Inc. Stock Quote
Textron Inc.
TXT
$62.76 (-1.40%) $0.89
Raytheon Company Stock Quote
Raytheon Company
RTN
HEICO Corporation Stock Quote
HEICO Corporation
HEI
$132.93 (-0.33%) $0.44
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$425.62 (-2.00%) $-8.71
General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$217.78 (-3.63%) $-8.20

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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