What happened
Markets surged higher on Monday morning following the announcement of one of the most significant developments to date in the fight against COVID-19. Airline stocks, among the biggest losers during the pandemic, are leading the charge higher, and the companies that rely on airlines for sales are close behind.
Shares of Boeing (BA -0.76%) were up 12% as of 10 a.m. EST, and key Boeing suppliers also benefited: Spirit AeroSystems Holdings (SPR -2.34%) was up 23%; Triumph Group (TGI 2.54%) and Allegheny Technologies (ATI -1.33%) were both up more than 16%; TransDigm Group (TDG 3.45%) was up 11%; and both Heico (HEI 2.71%) and Raytheon Technologies (RTX -0.18%) were up more than 7% apiece.
So what
Investors have Pfizer to thank for the market's strong performance on Monday morning. Before markets opened, the drug company announced its COVID-19 vaccine had a success rate of more than 90% in a study of thousands of volunteers.
Assuming the results are verified and the company gets government approval, Pfizer said it could start rolling out the vaccine before year's end. It will still take months to vaccinate the public, but today's announcement is being viewed by the markets as the beginning of the end of the pandemic.
Image source: Boeing.
That's good news for airlines, which have seen travel demand evaporate due to the pandemic. That, in turn, has caused carriers to ground planes and cancel growth plans, which has eaten into the bull case for commercial aerospace suppliers.
Boeing, part of a duopoly with Airbus (EADSY 1.32%) supplying new planes, was down about 50% heading into Monday and has seen new jet cancellations outpace orders so far in 2020. The stocks of many of its suppliers have fared worse, because they don't have the diversification Boeing enjoys thanks to its large defense business.
Spirit, a former Boeing subsidiary, makes the fuselages for Boeing's 737 MAX and other planes and counts on Boeing for nearly 75% of its revenue. Triumph and Allegheny make a lot of the components that go into those jets, while TransDigm and Heico specialize in the spare parts, or aftermarket, side of the business. Raytheon Technologies owns both aircraft engine maker Pratt & Whitney and the Collins aviation interiors business.
Any rebound in aviation demand should lead to higher demand for these suppliers' products, and that has investors excitedly buying in on Monday.
Now what
The vaccine development is without doubt good news for the airlines and their suppliers, and investors should be excited. But a little perspective is in order.
We've been hoping that a vaccine would be ready by late 2020/early 2021, and the bull case for airlines and aerospace has long assumed the vaccine would be widely available in time for the summer vacation season. Even in that scenario, however, airlines have projected it will take years for travel demand to recover to prepandemic levels.
Given that the airlines have taken on billions in new debt to survive the crisis, they are likely to be conservative for a while when it comes to buying new airplanes. Boeing also has the 737 MAX issues to work through: The plane is expected to soon be cleared to fly again after two fatal accidents, but Boeing has built up a substantial backlog of inventory that must be delivered before suppliers like Spirit will see new orders accelerate.
Of the stocks mentioned, I prefer TransDigm and Heico due to their focus on the aftermarket. As airlines slowly rebuild their schedules, they are likely to lean heavily on their existing fleets, which should mean that demand for spare parts will return before demand for new airplanes.
Raytheon Technologies, thanks to its sprawling defense business, is also a relatively safe way to invest in the recovery, but its Collins business is likely to need time to recover if airlines skip cabin interior refreshes to save money.
Pfizer's vaccine announcement is the clearest indication yet that the destination is in sight. Just be warned that it will still take a lot of time to get there.
