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A Two Trillion Dollar Plus Market on Display in Paris

|Includes:BA, COL, GD, GR, HON, HRS, PCP, PowerShares Aerospace & Defense Portfolio ETF (PPA), TXT, UTX

Part conference, part trade show, and part bazaar, the bi-annual Paris Air Show gets more than 100,000 visitors from around the world and the week will feature the announcement of billions in new military and commercial contracts from around the world. The SPADE Defense Index hit 52- week highs in May before the market downturn and reflects hidden strength in spite of the sector being under pressure by investors fearing government budget cutbacks.  Statistics from SIPRI (www.sipri.org), the Stockholm International Peace Research Institute, shows the overall market for defense exceeding $1.6 trillion annually with the commercial aerospace market adding several hundred billion in manufacturing business. 

1. The U.S. Department of Defense recently announced that it  is processing a record backlog of $327 billion in orders to 165 countries, with $46.1 billion to be completed in 2011.  This $327 billion figure represents more than half the total core annual budget of what the U.S. spends on defense and is roughly equal to three years of U.S. Department of Defense procurement.

2.  Boeing raised its forecast for total global aircraft demand over the next 20 years by 8% to 33,500 planes as growth in Asia and the Middle East and a shift toward more fuel-efficient planes drives the total to $4 trillion.  Later this year Boeing will begin delivery of its 787 passenger jet and will provide a pop to the sector and keep manufacturing facilities at U.S. aerospace suppliers humming. 

3. It is estimated that $50 billion to $100 billion in new orders and deals will be announced in Paris by commercial airlines and government agencies around the world. 

Many of the defense sector's firms also have exposure to the commercial aerospace sector which is at the beginning of a multi-year growth cycle.  This  includes passenger transport (Boeing - NYSE: BA) and the sectors' suppliers (Goodrich - GR; Precision Castparts - PCP; Harris - HRS; Rockwell Collins - COL; Honeywell - HON; Moog - MOGA, L-3 - LLL, etc.); small private aircraft (ex. General Dynamics which owns Gulfstream - GD), and helicopters (Textron - TXT and United Technologies - UTX).  From mid-to-late June, look for major contract announcements from these firms and others as positive news on the sector is picked up by the world media outlets. 

For those more inclined to play the sector via an exchange traded fund.  The Powershares Aerospace & Defense ETF (NYSE: PPA), which tracks the SPADE Defense Index, is up 99.5% since the market bottom in 2009 and is listed on the NYSE as well as the Mexico's Bolsa.
 



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Scott Sacknoff manages the SPADE Defense Index (NYSE: DXS) an investment benchmark for the aerospace, defense, and homeland security sector. The index has been licensed to Powershares for its aerospace and defense exchange traded fund.
Stocks: PPA, BA, GR, PCP, HRS, COL, HON, GD, TXT, UTX