When thinking about investing in the commercial aerospace recovery, it's natural for investors' thoughts to turn to Boeing (BA 0.25%). But is it the best way to invest, or is a less well-known aerospace supplier like Carpenter Technology (CRS 2.75%) a better option? I think the answer is the latter. Here's why.
Boeing's production rates
Boeing's medium-term plans, as laid out in its investor day presentation in November 2022, involved raising its delivery rate in the 737 aircraft to between 400 and 450 in 2023 and then to a rate of 50 a month (600 a year) in 2025 and 2026. These metrics are critical to the company's aim of hitting $10 billion in free cash flow in that period -- a figure investors use to value the company.
Unfortunately, Boeing is falling behind that schedule with only 389 deliveries of 737 airplanes in 2023, as it suffered manufacturing quality issues, not least from fuselages supplied by Spirit AeroSystems. Moreover, there are question marks around its delivery rate in 2024 in the aftermath of the blowout of a fuselage panel on an Alaska Air flight in early January.
Boeing's management recently told investors it was moving toward a delivery rate of 38 a month in the second half. However, the company said regulators will dictate the pace. The Federal Aviation Administration (FAA) is currently auditing Boeing 737-9 MAX production lines.
Image source: Getty Images.
A figure of 38 a month is fine and worthy, but it implies an annualized rate of 456 a year (which Boeing was supposed to be close to in 2023). It's also some way off from the 50-a-month target for 2025 and 2026.
As such, it was no surprise that CFO Brian West said during the company's earnings call with analysts in late January that "it may take longer in that window than originally anticipated" to hit its free-cash-flow (FCF) target.
What does it mean for Boeing?
The uncertainty around Boeing's commercial production rate is one issue, and there's also the issue that its defense arm, Boeing Defense, Space & Security (BDS) lost money in 2023 as it continues to suffer supply chain issues and work through fixed-price contracts won in less inflationary periods.
The pressure on Boeing's production rate led at least one analyst, Morgan Stanley's Kristine Liwag, to downgrade a supplier of advanced composite materials, Hexcel, to a sell rating recently.
How to best invest in the sector
If you are looking for a different way to invest in the sector, you could consider Carpenter Technology, a manufacturer of premium specialty alloys that generates around half of its revenue from aerospace and defense, supplying the market with engine parts (rings, discs, bearings, etc.), fasteners (for airframes and engines), and structural and avionics (landing gear parts and auxiliary power unit parts).
The critical difference between the investment propositions at Boeing and Carpenter is that original equipment manufacturer (OEM) Boeing is obligated to increase production and is supporting key supplier Spirit AeroSystems to enable it to keep up with planned 737 production rates.
Carpenter's parts are also sold in the maintenance, repair, and operations (MRO) market. As Carpenter CEO Tony Thene noted on the company's earnings call in late January: "If you would see any type of movement on the OEM side, that MRO demand would go up even further. And certainly, Carpenter Technology" is "delivering that demand, whether it be OEM or MRO."
A stock to buy
Carpenter's fiscal year finishes at the end of June, and Wall Street analysts have the stock trading at 16.5 times 2024 earnings and dropping to just 13.5 times earnings at the end of June 2025. Given its relatively high fixed costs, it margins can fall dramatically in a slowdown and expand rapidly when its revenue grows.
CRS Operating Margin (TTM) data by YCharts
Carpenter is a better bet than Boeing to play the commercial aerospace recovery, and the stock could outperform the broader market in 2024.
