June 28, 2024
The Hidden Way to 'Short Boeing'
Dear Subscriber,
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| By Michael A. Robinson |
Like millions of other summer travelers, my wife and I have been thinking a good bit about aviation safety of late.
See, we mostly fly Southwest Airlines (LUV), which relies heavily on 737s made by Boeing (BA).
As you are no doubt aware, Boeing has had a lot of negative news of late for big safety problems with that very fleet of planes.
And while we have not been on a troubled flight, the recent problem with an Alaska Airlines journey is making us reevaluate where we sit on a plane.
We usually sit in a row next to the emergency door that has only two seats.
In the recent ill-fated Alaska flight, a plug where an exit door would have been blew out in midair. Fortunately, no one was killed or seriously injured.
But the incident served as a wakeup call to us and millions of others. At the very least, it’s a great idea to have your seatbelt buckled unless you are going to the restroom.
There’s more than just a personal anecdote at play here. Fact is, Mordor Intelligence says the aviation sector that includes safety is part of a market valued at $393.8 billion.
And today, I’m going to reveal a great supplier that is poised to profit from increased focused on flight safety and is on pace to double earnings in just three years.
In that regard, you can think of this as a hidden way to “short Boeing.”
One Falls Down,
One Steps Up
Post WWII, Boeing was so reliable and so many pilots depended upon their Boeing planes that the refrain, “If it ain’t Boeing, it ain’t going,” was a pilot’s mantra.
And since many of those military pilots transitioned into commercial pilots during the Jet Age, that mantra lasted for decades.
But the 21st Century Boeing is shadow of its former self. The recent Congressional hearings — and news stories — bore that out.
Senators from both sides of the aisle assailed the aerospace company’s recent safety record. They also questioned whether its priorities as a jet maker were no longer to be a mission-driven aerospace company but a well-feathered nest for senior executives.
And this all comes at a very interesting time in the commercial aircraft and the aerospace sectors.
While Boeinghas its engineering and management issues, its economists and market analysts remain upbeat about jet demand. And they forecast a commercial aviation boom lasting until at least 2041.
Its chief rival, Airbus, is equally bullish. That would mean new airplane deliveries will increase by 80% through 2041.
That’s a total market value of commercial services coming in around $3.6 trillion.
The key difference now: This massive market opportunity may well be moving away from Boeing as a key supplier, particularly for parts and maintenance.
Case in point, even after years of issues, a couple weeks ago, one of its 737 Max 8 (the model that was supposed to be “fixed”) — and one of Southwest’s jets! — got pushed down to within 400 feet of the ocean.
And last week, another Southwest 737 from Boeing dropped to within 500 feet of an Oklahoma neighborhood.
Whistleblowers have also been coming forward, and news stories continue to discuss quality and safety issues with the company’s 787 fleet as well.
Yet, one company’s crisis is another company’s opportunity.
The Quiet Rival
The company where I see the most opportunity is TransDigm Group (TDG). It’s composed of 50 independently run operating units.
Each rank as a market-leading brand recognized for their quality, highly engineered product. They produce parts for nearly every commercial and military aircraft platform.
In the commercial airline space alone, maintenance was a $101 billion sector in 2022. TransDigm has leading products in $47 billion of that sector. And as air travel grows, so will its market share.
It’s a key supplier to most major airlines — American, United, Delta and of course, my Southwest, to name a few. It also supplies aftermarket parts for an array of Boeing and Airbus models.
What’s more, new parts designs of the plane makers’ most in-demand models are projected to drive TransDigm revenue significantly higher in coming quarters as parts are upgraded.
And this doesn’t even take into account its parts business for military aircraft and aerospace. It’s a top contractor on major strategic platforms like F-35 and F-16 fighters, C130 and A400M cargo planes, as well as the Blackhawk helicopter.
Because military criteria are so high and specific, TransDigm stands to benefit significantly as these parts are replaced with more regularity due to their high-performance nature.
It’s no surprise then, that aftermarket parts sales account for about 75% of TransDigm’s earnings.
Up, Up & Away
It’s pretty clear why I’m so excited about TransDigm’s prospects in both the short and long term.
It’s a proven aftermarket supplier that has none of the quality and reliability baggage that Boeing has brought upon itself.
TransDigm is a great low-profile choice as commercial travel grows globally and technology is allowing plane makers to upgrade parts and equipment much more rapidly than they have in the past.
Of course, its long history of delivering quality parts is now one of its greatest advantages, as well.
And that’s already showing up in its earnings.
In the most recent quarter, sales growth in commercial aftermarket parts was up 27%. Defense orders were also strong.
It was no surprise — but thoroughly welcomed on the Street — when management raised full-year 2024 forecasts for revenue and profitability.
But this isn’t unusual for TransDigm. It’s been growing its book of business for years.
For example, over the past three years TransDigm has grown per-share profits by an average 48%.
If we cut that in half to be conservative, we could still see earnings double in as little as three years.
Simply put, TransDigm is a great long-term play on the boom in air travel — and aviation safety.
So, if you plan on a summer trip and want to put your money into something dear to you — like your safety — there’s no better option than this.
Best,
Michael A. Robinson
P.S. TransDigm is making good money on its defense aerospace portfolio. But it isn’t the only one.
I recently recommended readers add another that is growing even more with AI.
You can get that name and many others in this space if you check out my new report here.
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