Market Headwinds Affecting Aerospace Stocks

Difficulties from many directions have put pressure on stocks in the Aerospace/Defense industry. Are there any silver linings we should be looking for, based on valuation or an improving business cycle? Zacks senior equities analyst John Nelson Simon was on hand to give us his thoughts.

Have high fuel costs also impacted suppliers to airplane manufacturing companies yet?

High fuel costs have not yet impacted the results of the Aerospace/Defense companies I follow; in fact, they are, for the most part, doing quite well. On the other hand, the stocks of the Aerospace/Defense companies I follow are mostly in free-fall. For example, take a look at Triumph Group's (TGI) chart: it has lost some 50% of its value since the beginning of the year, which I believe can be attributed to the rise in fuel costs, which now represent over 60% of the total cost of running a domestic airline.

Add to that the slippage of the 787 as well as the A400M, the ramifications of the mortgage crisis, the concerns about the ultimate effect of the upcoming election and the question regarding how long the rest of the World will continue to finance the USA, and you have really bad environment for these stocks.

What are you expecting from second quarter earnings season, in general?

As far as the quarterly earnings that have already started trickling out, they appear to be in the ball park. However, Boeing (BA) is taking some hits, so it's possible some others will also...perhaps just not right away. However, the stocks act like the grave events are forthcoming.

Do you see a down-trend continuing for an extended period, or is there light at the end of the tunnel?

The light at the end of the tunnel could be a freight train; however, once it passes through - in a year or so - conditions should become clearer. I really believe that deliveries of the 787 will brighten the picture significantly, as many people still do not believe it is "real" airplane...just a "dream" liner.

Are U.S. military contracts expected to stay strong, even if, say, the Democrats take over the White House next year?

In my opinion, military contracts are a real question mark, even if the Republicans win. Remember, we are financing our forays by borrowing money from the rest of the World; how long will we be able to do that before we shoot ourselves in our wallet? The population appears to be just as unhappy with Iraq as it was with Viet Nam...or, for that matter, Korea.

Which companies do you have Buy recommendations on at this time?

I have Buy recommendations on Esterline Technologies (ESL) and Triumph Group...but the Zacks computer only agrees with me about ESL, so I may have to rethink TGI.

John Nelson Simon is a senior analyst covering the aerospace industry for Zacks Equity Research.