A quick scan of the Dreamliner’s International Team leads me to a couple of conclusions. Boeing broke the 787 down into A LOT of subcomponents and subsystems and as many partners/suppliers for each. But where are all the public American companies to buy for a Dreamliner trade? Dreamliner parts come from all over the world from Japan to Germany and France (why France??). The remaining partners/suppliers are either a internal division of Boeing (c’mon, spread the wealth!) or small private aerospace companies. Worry not. There still are a handful of well-known and some not-so well-known public companies that could fly with the Dreamliner.
Large-Cap Aerospace Conglomerates
1. Boeing (BA) - As mentioned previously, I believe the key for the Dreamliner business is in the production methods. In 2008 into early 2009, I’m looking for margin expansion as Boeing continues to sell 787’s like hotcakes while manufacturing costs drop. It may be time to sell some Boeing a couple of months after Boeing hits that target production rate of 3 days for a Dreamliner. The commercial airplane business for Boeing accounts for roughly 50% of it’s business and should be the fastest driver for the stock. Meanwhile, the aerospace and defense business are still in super bull mode with defense contracts providing steady support for the stock.
2. United Technologies’ Hamilton Sundstrand Business (UTC) - [Auxiliary power unit, environmental control system, remote power distribution units, electrical power generating and start system, primary power distribution, nitrogen generation, ram air turbine emergency power system, electric motor hydraulic pump subsystem] Other than the environmental control system, this long list of products simply fall under power systems technology. In 2006, United Techonologies’ Hamilton Sundstrand business only raked in revenues of $5 Billion compared to the leading businesses of Carrier ($13.5 Billion), Pratt & Whitney ($11.1 Billion), and Otis ($10.3 Billion). However, I believe Hamilton Sundstrand’s revenues have been lagging due to investments in R&D for the 787. As production for the 787 starts ramping over the course of 2008, Hamilton Sundstrand’s revenues should be strong as the business cashes in on it’s R&D investments. Hamilton Sundstrand’s business isn’t big enough yet to significantly boost United Technologies’ bottom line, but it will definitely compliment the already strong aerospace businesses, Otis as a global infrastructure play, and Carrier as an energy efficiency play.
3. Honeywell (HON) - [Navigation, maintenance/crew information systems, flight control electronics, exterior lighting] I am disappointed with the small number of components Honeywell has in the 787. Honeywell has 13 aerospace business serving all the parts Boeing contracted out, but Honeywell was only able to secure part of the avionics (electronics for aviation) while other avionics components went to Rockwell Collins. Really? Exterior lighting?! Boeing could’ve gone to Home Depot for that. Honeywell has too many businesses for these 787 components to matter much. Just a smidge off it’s 52-week high, Honeywell is still a buy on the aerospace boom and its controls business for energy efficiency, but don’t buy Honeywell just for the 787.
In part 2, we’ll look at some mid and small cap names.