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The Aerospace market can be divided into numerous sectors, consisting of: Military Aircrafts, Missiles, Space Aircrafts, Commercial Airlines, and General Aviation. This expansion can be attributed to several factors. In the case of Commercial Airlines, a direct correlation can be seen in the number of aircrafts for commercial use, and an upward trend economically. Tendencies to go on lavish vacations and purchase flights increase as individuals make more money. Military aircrafts and missiles are mainly purchased through government contracts, and with a Republican now in office, it is valid to assume high defense spending will continue. In addition, there are also several events that provide companies with contracts. For example, this past year, in the Paris Air Show, Boeing and Airbus were competing to get orders. In the more recent news, when North Korea was testing missiles, these stocks, along with gold, rallied.
For space, there continue to be major advancements in technology and new orders for these companies. A disruptor in this area would be SpaceX. A major advancement that can be seen is the launching of the Falcon Heavy aircraft that is planned to take place in early 2018. This is a major component in the commercial spacecraft industry. The hype surrounding this rocket’s launch—since the anticipation of waiting for five years and the CEO, Elon Musk, has been advertising this rocket on social media—has the world excited. The company’s ultimate goal is to have humans inhabit other planets. This company has the potential to disrupt the others in this space by taking away market share. This company will lead the charge toward advancements in extraterrestrial exploration. This sector has been the fastest growing market in the U.S, with 14 percent yearly growth. The top companies in the space are: Boeing, Raytheon, Kratos Defense & Security Solutions, Lockheed, General Dynamics, Airbus, and United Technologies.
In-Depth Example (Information is taken from Quarter 3 2017)
A top performer this year for the Dow Jones Industrial Average, Boeing is the perfect example to investigate for this space. Investors are taken care of by Boeing buying back stock and giving out a substantial dividend, while also reinvesting capital for future growth. In the commercial airplane market, Boeing continually exhibited healthy sales numbers. However, the key statistic is the backlog. Boeing has transitioned into producing 47 of their 737 aircrafts per month. For the 787 program, Boeing plans on increasing their production to 12-14 airplanes per month in 2019. In order to reach these targets, Boeing began introducing more automated assembly lines. They are currently using an automated system for the wings of their aircraft. In defense and space portfolio, Boeing received six billion dollars in new orders during this quarter. In addition, Boeing won the contract for the next Air Force One. Also, the President’s budget request included: F-18, CH-47 Chinook, Ground-Based Midcourse Defense, AH-64 Apache, P-8 Poseidon, and more. Military programs should exponentially increase. This demand can also be seen within the space market. More specifically, the space market can be seen growing globally with satellites, which are continually in demand. Boeing is currently leading the way in Aerospace, as they are not only focusing on receiving new orders, but also attempting to increase production.
When investing in this sector, there are some risks to keep in mind. When investing in individual companies, certain things should be periodically checked. The most important warning sign to look for is the company’s production rate of aircrafts. It is likely that most companies have problems with this, but the companies that go about resolving this issue will continue to have success. Also, companies must be able to maintain the high quality of their products. Competition is strong in this space, so focus on the companies who are winning contracts. M&A recently has changed, and companies focus more on mergers for expansion in growing markets like Asia and the Middle East. Companies that specialize in these areas are potential takeovers.
How to invest?
Due to the underlying risk of competition among the companies to win government contracts and complete their backlog the fastest, a great way to invest in Aerospace is through ETF’s. The sector, as a whole, is going to have a strong future. The economy is stable, with increasing GDP growth. Another positive with the space is seen in the lower price of crude oil. Additionally, with travel increasing globally, the demand for commercial aircrafts will continue to grow. The top ETF’s I recommend are ITA, PPA, and XAR. The ITA was up 35.17 percent in 2017. Look to see the holdings of each ETF mentioned and choose the one you feel most comfortable with.