Outperforming the Market by 21% to 31% in 2022, These 3 Stocks Still Look Like a Good Value

Despite the market declines, it's been an excellent year for stocks with exposure to commercial aviation, and the theme remains an attractive one in which to invest. Although Raytheon Technologies (RTX -0.09%), AAR Corp (AIR 1.23%), and Hexcel (HXL 0.16%) are vastly different businesses, they have all seen improvement in their commercial aviation-focused businesses, and they are all investment options in a challenging market.

1. Raytheon Technologies, a tale of two end markets

On the surface, Raytheon's guidance for the full-year 2022 has been steady as a rock. Management hasn't changed its guidance for full-year adjusted earnings per share (EPS) of $4.60 to $4.80 and free cash flow of $6 billion. However, those figures only tell half the story. In reality, defense-focused businesses (Raytheon Intelligence & Space and Raytheon Missiles & Defense) have suffered from supply chain issues and an inability to adequately procure materials such as titanium structural castings. Moreover, meeting management's guidance for Raytheon Missiles & Defense will be challenging.

In contrast, management recently raised its guidance for its commercial aviation-focused businesses -- Collins Aerospace and Pratt & Whitney. As you can see below, both segments are set to improve profitability more than management expected at the start of 2022. 

Data source: Raytheon Technologies.

It all adds up to a company that's benefiting from an ongoing recovery in commercial aviation, and management continues to believe it will hit $10 billion in free cash flow by 2025. Given the progression in 2022 and the potential for an ongoing aviation recovery to 2019 levels by the end of 2023, it's a figure that looks achievable. 

2. AAR Corp

The company provides aviation services (parts supply, maintenance, repair, operations, and flight support) to government and commercial customers. It also has a small expeditionary services business, providing containers, shelters, and pallets. As such, it's a play on the increased activity of its global and regional airlines, cargo airlines, and the U.S. Department of Defense. For reference, two of its key original equipment (OE) suppliers are Pratt & Whitney and Collins Aerospace (discussed above).

Just as with Raytheon Technologies, it's a tale of two end markets for AAR in 2022. The market was left unimpressed by AAR Corp's last earnings report (its fiscal fourth quarter of 2022), which saw sales to commercial customers rise 28% over the same quarter of last year but sales to government customers decline 13%. The latter is due to the decline in defense activity following the U.S. exit from Afghanistan. Still, the company's adjusted operating profit increased 46% from $22.7 million in Q4 2021 to $33.1 million -- a demonstration of the margin-expansion opportunity as commercial sales recover. Wall Street analysts believe the ongoing recovery in commercial flight departures will enable AAR to grow the reported operating margin from 5.87% in fiscal 2022 to 7.4% in fiscal 2023, leading to a 32% increase in operating profit in 2023.

3. Hexcel

Whereas AAR is all about the aftermarket, and Raytheon is exposed to the original equipment (OE) market and the aftermarket, Hexcel's aerospace and defense sales are almost entirely exposed to OE sales. Its advanced carbon fiber composites are lighter and stronger than alternative materials, such as aluminum, and are increasingly used on newer aircraft as they give a weight advantage. That's a key plus for airlines and militaries looking to reduce fuel costs and increase strength. As such, Hexcel is a play on increased aircraft production and the ongoing trend toward using more advanced composites in newer planes. In other words, Hexcel could see profit expansion even if the same volume of aircraft is produced each year, provided there's a shift toward newer models. 

Focusing on the commercial aviation business -- dominated by exposure to Boeing and Airbus -- it will take time to ramp production rates given supply chain difficulties. Therefore, investors in Hexcel can look forward to a multiyear increase in revenue, margin, and profit as aircraft production recovers to 2019 levels and beyond, albeit with newer models containing more Hexcel content per plane.