Although a number of suppliers to the aerospace industry have come under pressure as of late, the strength in commercial aerospace demand remains firm. The backlogs at Airbus (OTCPK:EADSY) and Boeing (NYSE:BA) cannot be fuller at roughly 7-8 times annual production, and the massive success of recent narrowbody launches at the airframe makers speak to a steady and continued pace of orders. In fact, since Boeing rolled out plans to re-engine its 737 within the past year or so, the aerospace giant will likely pull in nearly 1,000 orders for the plane, dubbed the 737MAX, by this summer. That number doesn't even consider orders for other planes in Boeing's portfolio, like the 787 Dreamliner, which is just starting to ramp up production. And Airbus' revamped A320neo (new engine option) has already claimed 1,425 orders since it recently rolled out plans for an upgrade. We expect both firms to garner a book-to-bill above 1 for the year, despite global economic uncertainties. In fact, the story of aerospace is more of execution at this point, as the industry already has years and years of work just waiting to flow through as revenue.
Shares of our favorite aerospace suppliers-EDAC Tech (NASDAQ:EDAC), Precision Castparts (NYSE:PCP), and Astronics (NASDAQ:ATRO)-will only benefit from such ongoing strength. Plus, we think these firms trade at dirt-cheap valuations. EDAC Tech, which has experienced backlog growth at a pace that is far greater than any other firm in the aerospace supply chain, is trading at just 8.4 times next year's earnings, a valuation that simply does not make any sense to us. The shares are flat-out cheap, and earnings growth through the coming upswing in commercial aircraft deliveries will be robust. Astronics is trading at roughly 16 times next year's earnings, and Precision Castparts is trading at about 14 times. Though Astronics' and Precision Castparts' multiples may not be something to write home about, their exposure to the strength of the coming boom in aircraft deliveries is no less strong. EDAC Tech, on the other hand, is one to write home about, as market mispricings like this don't come around that often.
Additional disclosure: Some of the firms mentioned above may be included in our actively-managed portfolios.