It's no secret that the aerospace sector took a severe hit due to the COVID-19 pandemic. Moreover, many travel sector experts don't expect flight departures will recover to their 2019 levels until 2024.
However, instead of worrying about where the aerospace industry has been during the last couple of years, investors would be better served to focus on the multiyear recovery ahead. In that context, aviation-heavy conglomerate General Electric (GE -0.43%), advanced composites supplier Hexcel (HXL 2.60%), and simulator and pilot training company CAE (CAE 2.35%) all look like attractive stocks to buy now.
GE Aviation is GE's most important business and its most significant earnings and cash-flow generator. Either directly or as part of its joint venture with Safran, CFM International, the business is responsible manufacturing for the engines that power around two-thirds of global flight departures. As such, GE Aviation will have to be the cornerstone of GE's recovery story as management tries to return the conglomerate to generating high-single-digit free cash flow (FCF) margins and at least $7 billion of FCF by 2023.
However' GE Aviation is a lot more than just a medium-term growth story. The reality is that in the aircraft engine business, the serious money is made during the long-tail period of servicing the engines rather than from the initial equipment sales. For example, at the end of 2020, GE had a backlog of $25 billion in aviation equipment compared to a $219 billion aviation services backlog. Typically, an engine will receive four major "shop visits" over a 20-plus-year lifetime.
GE's management notes that more than 60% of its and CFM's, engine fleets have had one shop visit or less. As such, investors can expect many years of growth in earnings and cash flow from the low point represented by 2020.
The labor market for airline pilots is forecast to move from an oversupply to a severe shortage over the next few years. If that scenario proves accurate, then pilot simulator and training services company CAE stands to benefit significantly. It may seem bizarre to talk of a looming pilot shortage when the industry is still getting back on its feet, but it's a genuine possibility.
In fact, the industry was staring a pilot shortage in the face just before the global economy entered the pandemic lockdown and travel volume plunged. That shortage was due to a combination of surging growth, an aging pilot population, and mandatory retirements. Almost two years later, and cash-strapped airlines have accelerated pilot retirements, junior pilots have sought alternative careers, and potential pilots have shied away from the lengthy and expensive training required to earn one's wings.
It all adds up to the makings of a problem once airlines are ready to get flight departures back to the pre-pandemic normal. In 2019, CAE estimated there would be a need for 320,000 new pilots over the next decade. Fast-forward to 2021, and Boeing's (BA 1.59%) forecast is for 612,000 new pilots (not counting business aviation and helicopter pilots) will need to be added to the workforce over the next two decades.
As counter-intuitive as it may sound, the pandemic is likely to exacerbate the looming pilot shortage. Given that CAE spent much of the past two years growing its higher-margin training business via acquisitions, the company stands well placed to benefit for years to come.
Few businesses got hit harder by the pandemic than Hexcel. The company produces lightweight carbon fiber reinforcements and resin systems, and aerospace is its core end market. Moreover, there's very little aftermarket demand for its products -- its primary demand driver is airplane production.
The case for buying the stock has always been that newer planes tend to have far higher shares of advanced composites content. Hexcel's advanced composites are stronger and more lightweight than traditional materials like aluminum, and that's a crucial consideration in aviation, where lower aircraft weights usually translate into more cost-efficient planes.
It will take at least a few years for Hexcel to get its revenues back to where they were in 2019, when it generated nearly $2.4 billion worth of sales. Still, both Airbus and Boeing are ramping up production plans on their narrow-body aircraft. The wide-body market recovery is likely to follow in time. In short, it's not a question of if Hexcel will make a full recovery, but when.