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Why Shares of Aerospace Suppliers Were Up Today

By Lou Whiteman – Jun 29, 2020 at 4:59PM

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Boeing's good news is giving the entire commercial aerospace sector a lift.

What happened

News that Boeing's (BA -5.37%) 737 Max is flying again gave a lift to a number of the aerospace company's key suppliers. Shares of Triumph Group (TGI -6.73%) closed up 18% on Monday, while shares of Allegheny Technologies (ATI -4.06%) climbed 9.4% and shares of Heico (HEI -2.11%) gained 5.8% on the day.

The commercial aerospace sector needs a lot more than the 737 Max to regain altitude. But getting one of Boeing's most important jets off the ground is, if nothing else, an important step in the right direction.

So what

Commercial aerospace suppliers have been hit hard by the COVID-19 pandemic, which has caused airlines to cut flights and rethink growth plans. But for companies involved in the Boeing 737 Max supply chain, the pain started well before the pandemic, with the Max grounded in March 2019 after a pair of fatal accidents.

A plane being serviced in a hangar.

Image source: Getty Images.

Boeing has misfired on a number of self-imposed deadlines to get the 737 Max back into service, but the company appears to finally be moving toward the goal. The Federal Aviation Administration conducted its first 737 Max recertification test flight on Monday, keeping the plane on track to win approval to fly passengers again in the second half of 2020.

Triumph Group makes landing gear, gearboxes, and other components for the 737 Max, while specialty-metal producer Allegheny makes a range of components for the plane and its engines.

The 737 Max is not a huge part of Heico's business, but the company's shares went along for the ride on Monday in part because the prospects for recertification are causing investors to take a fresh look at the commercial aerospace sector.

Now what

Getting the 737 Max going is key to making a bull case for commercial aerospace companies, as the plane was once expected to be among the top-selling jets of all time. But even if recertification is moving in the right direction, Boeing still has a number of boxes to check.

It continued to manufacture the plane through its grounding, and has more than 400 airframes that have been assembled but not yet delivered. That backlog of inventory, coupled with pandemic-related travel declines, is going to limit 737 Max production rates through at least 2021 and potentially beyond.

Of all the stocks in the Boeing supply chain, Heico is the one worth watching closely. Heico needs commercial aerospace to be healthy to generate outsize returns, but the company gets about half of its revenue from outside commercial aerospace and is a pretty good choice for investors who want to play an eventual recovery in flying without being overly exposed to the sector.

On a good day for the entire aerospace parts sector, Heico is getting well-deserved attention as a top aerospace buy.

Lou Whiteman owns shares of Allegheny Technologies. The Motley Fool recommends Heico. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Allegheny Technologies Incorporated Stock Quote
Allegheny Technologies Incorporated
$27.86 (-4.06%) $-1.18
Triumph Group, Inc. Stock Quote
Triumph Group, Inc.
$8.87 (-6.73%) $0.64
HEICO Corporation Stock Quote
HEICO Corporation
$145.66 (-2.11%) $-3.14
The Boeing Company Stock Quote
The Boeing Company
$131.26 (-5.37%) $-7.45

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

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