Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of Commercial Aerospace Suppliers Are Surging Today

By Lou Whiteman – Updated Apr 9, 2020 at 2:49PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Optimism is growing that the sector's most important customers will survive the pandemic.

What happened

Commercial aerospace suppliers have been hard hit by the COVID-19 pandemic, with airlines grounding planes in response to travel declines, and lower demand for spare parts and new planes from Boeing and Airbus.

But the shares have gotten a lift in recent days, as investor optimism grows that the pandemic's impact on the economy will be short-lived and airlines will be able to survive the shutdown. Shares of Spirit AeroSystems (SPR -0.90%) were up 11.5% as of 1:30 Thursday, with shares of TransDigm Group (TDG -1.05%)  up 10.9%, and the stock of Triumph Group (TGI -2.61%) up 8.6%. Earlier today, all three companies were up between 13% and 19%.

So what

Aerospace suppliers have had a strong decadelong run, with airlines expanding their schedules and buying new, more fuel-efficient jets in response to growing global travel demand. But the good times came screeching to a halt as the pandemic hit and travel demand plunged.

Boeing recorded more cancellations than new orders in February, and earlier this month one of its largest customers canceled orders for 75 of its 737 MAX jets. Airbus said it was cutting new-plane production rates by one-third or more.

A plane receiving maintenance in a hanger.

Image source: Getty Images.

That's trickling down to the supply chain. TransDigm last week said it was cutting its workforce by about 15% due to an expected slowing of sales, while Triumph announced it was eliminating 250 positions. On Wednesday, Spirit Aero announced a series of cuts to match a production slowdown instituted by Boeing.

But the stocks have gained altitude this week along with the broader markets, fueled by hope that the worst of the pandemic will soon be behind us. The shares were also likely boosted on Thursday after Treasury Secretary Steven Mnuchin, during an interview on CNBC, said the airlines were a top priority for assistance and that Boeing and its supply chain were also being watched closely.

Mnuchin also said that if conditions continue to improve, the White House could look to restart the economy as soon as May. That would provide a much-needed lift to the airlines, and with it, assistance to the companies that support the carriers.

Now what

It's important to note that the positive momentum this week has been powered by hope, and not data. The pandemic remains a serious issue that is not yet contained, and a negative headline or two in the days to come could easily send stocks plunging.

But it does appear the mood on Wall Street is shifting from fear toward optimism that we will eventually get through this with the economy intact.

Of these three companies, I prefer TransDigm, due to the diversity of its business and proven ability to generate software-like margins. Spirit Aero and Triumph both have small defense businesses but will need commercial aerospace to pull its weight before they can really recover. Triumph in particular was in the early stages of a transformation, and its balance sheet could come under pressure in the second half of 2020 if these rosy projections about how quickly the shutdown will last do not come to fruition.

This could be a fantastic opportunity to buy commercial aerospace shares. But investors should remain cautious about how quickly a recovery will materialize, and stick with the top operators for now.

Lou Whiteman owns shares of TransDigm Group. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spirit AeroSystems Holdings, Inc. Stock Quote
Spirit AeroSystems Holdings, Inc.
$21.92 (-0.90%) $0.20
Triumph Group, Inc. Stock Quote
Triumph Group, Inc.
$8.59 (-2.61%) $0.23
TransDigm Group Incorporated Stock Quote
TransDigm Group Incorporated
$524.82 (-1.05%) $-5.58

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.