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 (NYSE:SPR) were up 11.5% as of 1:30 Thursday, with shares of TransDigm Group (NYSE:TDG) up 10.9%, and the stock of Triumph Group (NYSE:TGI) up 8.6%. Earlier today, all three companies were up between 13% and 19%.
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.
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.
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.