Six Aircraft Investments Worth Buying as Demand Rises 

Paul Dykewicz

Six aircraft investments worth buying feature two industry funds, an aerospace stock, two leasing companies and a plane manufacturer.

The six aircraft investments worth buying stand out as the aerospace sector seems to be at an existential crossroads in which its purpose and value is transitioning to a business model and a technology that can operate in a net-zero-carbon-emission world. The challenges of that shift are huge, especially in Europe where a huge amount of attention and energy is being devoted to the industry’s transformation to adapt to the emergence of a climate-sensitive culture.

Those in the industry now are challenged to show air travel can be done in a sustainable way. It is up to the aircraft manufacturers and suppliers to identify how sustainable flying can be achieved and when it will be possible.

Amid the aircraft industry’s recovery from the COVID-19 global pandemic, production rates for building plane are ramping up, according to BofA Global Research. However, narrowbody flights are still down by about 30%, while widebody flights are about 45% below normal globally, the investment firm wrote in a recent research note.

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Six Aircraft Investments Worth Buying Include a Pair of Industry Funds

Aircraft production rates are coming back to their norms but have further to go to bridge the gap. However, the effort to ramp-up production remains challenging.

Nonetheless, demand for goods and services is healthy in airlines, lodging, trucking and railroad companies, opined Bryan Perry, who tracks virtually all industries closely as the head of the Cash Machine investment newsletter, and the Premium Income Pro, Quick Income Trader, Breakout Options Alert and High Tech Trader advisory services. Indeed, 10 of 11 sectors traded up on two consecutive days during the past week, signaling that it might be time for investors to switch from selling into rallies to buying equities on any pullbacks, Perry added.

Paul Dykewicz interviews Bryan Perry at a MoneyShow conference.

However, inflationary forces, global logistical bottlenecks, COVID-19 lockdowns and a strong U.S. dollar are headwinds for many companies, Perry continued. He reported in his Premium Income Pro service this week that the Fed Watch Tool, which places odds on the U.S. central bank’s next move, shows a 75% probability of a three-quarter point rise and a 25% chance of a 1.00% rate hike.

Such Fed rate hikes are aimed at reducing inflation, but the Consumer Price Index recently reached a 42-year high of 9.1%, so multiple rate hikes in the months ahead may be required to achieve the desired results. The Fed’s initial view that inflation in previous months was “transitory” proved misguided.

Pension Fund Chief Chooses Two of Six Aircraft Investments Worthy of Buying

An investor interested in a diversified way to invest in this sector should consider an exchange-traded fund (ETF), said Bob Carlson, who heads the Retirement Watch investment newsletter. The ETF with the most consistent returns is Invesco Aerospace & Defense (PPA).

Bob Carlson, who leads Retirement Watch, meets with Paul Dykewicz.

The fund seeks to follow the SPADE Defense Index, which is focused on companies that are involved with aerospace and space operations considered important to the defense sector.

The fund had a 7.09% return in 2021 and is down only 0.34% so far in 2022. It owns 55 stocks with 53% of the fund in the 10 largest positions.

Top holdings are Boeing (NYSE: BA), Raytheon (NYSE: RTX), General Dynamics (NYSE: GD), Northrup Grumman (NYSE: NOC) and Lockheed Martin (NYSE: LMT). Boeing is one of the world’s largest aircraft manufacturers, but it has yet to fully recover from the fallout of two 737 MAX aircraft crashes in 2018 and 2019 that killed a combined 346 people. 

However, Delta Air Lines (NYSE: DAL) announced earlier this month that it would buy 100 Boeing 737 MAX 10 jets worth about $13.5 billion at list price with the option to purchase an additional 30 of the aircraft. At the Farnborough Airshow in London, Qatar Airways, a state-owned flag carrier of Qatar, announced on July 21 the purchase of 25 Boeing 737 MAX 10 airliners. Even though Boeing still is awaiting regulatory approval to fly the new-generation Boeing 737 MAX aircraft, the manufacturer has amassed orders for more than 1,000 of them.

Chart courtesy of www.stockcharts.com

ITA Also Is Among the Six Aircraft Investments Worthy of Buying

Another to consider is iShares US Aerospace and Defense (BATS: ITA), Carlson counseled. The fund seeks to follow the Dow Jones U.S. Select Aerospace & Defense Index. 

ITA rose 9.39% in 2021 and is down 3.38% so far in 2022. The fund’s top holdings consist of Raytheon, Lockheed Martin, Boeing, Northrop Grumman and Howmet Aerospace (NYSE: HWM). 

Chart courtesy of www.stockcharts.com

The least well known of that group of companies is Howmet Aerospace, but it is on the investment radar screen of Michelle Connell, a former portfolio manager who heads Dallas-based Portia Capital Management

Howmet Aerospace Joins List of Six Aircraft Investments Worthy of Buying

Pittsburgh-based Howmet Aerospace is a mid-cap growth stock that manufactures products used in commercial transportation, aerospace and other industries. In the next 10 years, the world’s commercial air fleet will go from 25,000 to 35,000 planes to achieve an average annual growth rate of approximately 8%, Connell said.

“HWM will benefit from this growth,” Connell counseled.

Chart courtesy of www.stockcharts.com

Russia has been a key source of titanium products that are used in aerospace. Since Russia’s invasion of Ukraine on Feb. 24 and continued military action in the country, the United States, the European Union, Great Britain, Canada, Japan, Australia and other nations have imposed economic sanctions in hopes of pressuring Russia’s President Vladimir Putin to halt his attacks. 

Howmet Aerospace is one of three suppliers outside of Russia that can step in to fill the void as a titanium supplier, Connell said. In addition, the company’s short-term supply chain issues appear to be resolved, she added.

Even though the invasion of Ukraine as a sovereign country violates international law, Putin has called it a “special military operation” and has dismissed widespread reports of war crimes perpetrated by the troops he ordered into the neighboring country. Documented news reports have found that Russia’s military has shelled hospitals, schools, residential areas, churches, nuclear power plants, oil refineries, a crowded shopping mall and a theater used as a shelter, aside from raping, torturing and executing Ukrainian civilians.

Russia also has been accused of stealing Ukraine’s grain and preventing it from going to Africa and other places where 140 million people face famine conditions. Turkey recently brokered an agreement with the United Nations and Ukraine for Russia to allow safe passage of ships in and out of three Ukrainian Black Sea ports in the Odesa region. Russia had blockaded those ports and the grain Ukraine had sought to export to its customers since the invasion began Feb. 24, setting in motion a global food crisis.

Russia’s Missiles Hit Odesa’s Port Facilities After Pact to Stop Grain Blockade

Not even a full day after agreeing to the deal, Russia carried out a missile strike on port facilities in Odesa, claiming it was targeting military sites rather than the grain at those ports that was supposed to ease famine conditions elsewhere in the world. With ports still blockaded and many Ukrainian airports destroyed, there only are peril-filled routes along the ground for grain to be moved haltingly and in the crosshairs of shelling by Russia’s troops.

Howmet Aerospace not only is poised to benefit from Russia’s decision to continue attacking Ukraine rather than keep its previous trading partners by adhering to international law and withdrawing its troops, but the company has “great financials,” Connell said. The aerospace company’s earnings per share are expected to meet or beat 25% or more during 2022 and 2023, she added.

Another huge plus is that Howmet Aerospace has $500 million in cash, as well as a $1 billion credit line that doesn’t expire until 2026, Connell said. The company also can retain the financing at its current low interest rate, she added.

Wall Street analysts foresee a potential 20% upside in the stock, but its fundamentals may warrant a 30% upside, Connell said. With the company expected to report its earnings on Aug. 4, Connell said it may be “worth establishing” a position beforehand.

AerCap Holdings N.V. Makes List of Six Aircraft Investments Worth Buying

AerCap Holdings N.V. (NYSE: AER), a Dublin, Ireland-based aircraft leasing company, has reported seeing a broad-based recovery in travel around the world as governments lift travel restrictions and demand for travel rises. An economic recovery appears to be at hand, said Aengus Kelly, AerCap’s chief executive officer.

“During the first quarter, we ceased all of our leasing activity to Russian airlines and took a charge primarily related to our aircraft and engines that remain in Russia,” Kelly said in a prepared statement. “We have filed insurance claims related to these assets and will vigorously pursue all available remedies to recover our losses.”

AerCap’s net loss for the first quarter of 2022, including net charges related to the Ukraine conflict, was $2.0 billion, or $8.35 per share. Net income for the first quarter of 2022 was $540 million, or $2.23 per share, after adjustments for net charges related to the Ukraine conflict and other items, the company reported.

BofA Global Research Ranks AerCap as a Buy

BoA gave AerCap a price target of $60 using a 0.9x price-to-tangible-book value on its 2023 estimate, excluding goodwill but not premium assets and maintenance rights. The investment firm’s 0.9x multiple compares to 0.3-1.2x over the last 10-year range.

Risks to the investment firm’s price objective for AerCap include global economic weakness, fuel price spikes, inability to access capital markets at attractive terms, terrorism and geopolitical events, BofA opined. Other risks are a downturn in aircraft values due to rising supply, a flattening yield curve, a sharp appreciation of the U.S. dollar, changes in equity risk premiums, stock market and financial company valuations, as well as lower than expected value of GE Capital Aviation Services (GECAS) assets that AerCap acquired on November 1, 2021.

Outperformance of expectations could stem from higher-than-forecast aircraft trading gains, faster-than-expected recovery in air traffic and commercial air travel, higher lease rates, stronger-than-expected economic growth, reduced fuel prices, U.S. dollar depreciation and access to credit at modest rates, BoA wrote.

Chart courtesy of www.stockcharts.com

Air Lease Corporation (AL) — Buy

Air Lease Corporation (NYSE: AL), a Los Angeles-based aircraft leasing company, showcased its global reach during the 2022 Farnborough International Airshow in England when it announced on July 18 that it arranged for long-term lease placements for six new Airbus A220-300 aircraft with TAAG Angola Airlines. The Airbus aircraft are scheduled for delivery to the airline starting in 2023 through 2024.

The lease placement for six new Airbus A220s with TAAG is the first to introduce Airbus aircraft to the airline, said Steven Udvar-Házy, executive chairman of Air Lease Corporation. The capabilities of the A220-300 will greatly enhance TAAG’s operational efficiency and expand its route network with the most modern, fuel-efficient aircraft, Udvar-Házy added.

“The A220-300 with its fuel efficiency, range and improved operating economics will progressively replace TAAG’s Boeing 737-700 fleet and allow the airline to optimize and broaden its flight schedule coverage and destinations from Luanda,” said Kishore Korde, executive vice president of Air Lease Corporation.

“We are alive, back in business, breaching with the past to achieve greater results and becoming a reference for Africa,” said Eduardo Fairen, CEO of TAAG. “This partnership emphasizes our commitment to grow and further improve our credibility among international stakeholders while creating a new value proposition for our passengers.”

Air Lease, rated a buy recommendation by BofA, announced long-term lease placements for three new Airbus A321neo aircraft with LATAM Airlines on June 1. The aircraft are scheduled for delivery to LATAM in summer and fall of 2023 from ALC’s orderbook with Airbus.

BoA Recommends Air Lease Among Six Aircraft Investments Worth Buying

BofA set a price target of $55 on Air Lease, using a 0.9x price-to-book value on its 2023 estimate of AL’s book value. The percentage of net book value at risk should disappear by 2023 due to improving market conditions as commercial traffic recovers from pre-pandemic levels by 2023) and riskier assets are sold as they come off lease.

Risks to BofA’s price objective for Air Lease include global economic weakness, fuel price spikes, inability to access capital markets at attractive terms, terrorism and geopolitical events. Additional risks entail a downturn in aircraft values due to rising supply, flattening yield curve, continued sharp appreciation of the U.S. dollar, changes in equity risk premiums and overall stock market and financial company valuations.

The price target could be beaten, BofA forecasts, if economic growth is stronger than expected, recovery of air travel tops current estimates, fuel prices fall, the U.S. dollar depreciates and credit can be obtained at modest rates.

Chart courtesy of www.stockcharts.com

Embraer Earns Berth Among Six Investments Worthy of Buying

Another BofA recommendation is Brazil-based Embraer, a manufacturer of regional jets, military, executive and agricultural aircraft, and a provider of aeronautical services. BofA placed a price objective of $27 on Embraer. The estimate includes a $2.1 billion enterprise value for Eve, an air mobility business created by Embraer as an independent company in October 2020.

The price target could be topped by stronger-than-anticipated air traffic recovery, a successful joint venture for commercial aviation, cost reductions, better-than-expected execution, sales that beat forecasts, sooner-than-projected recovery in light and medium business jets and increased Brazilian defense and security budgets. Slippage could stem from failing to list or otherwise realize the value of Eve, COVID-19 pandemic headwinds hurting commercial aviation and currency fallout, since some of the company’s cost base is denominated in Brazilian reals.

The Brazilian real’s strength relative to the U.S. dollar could negatively affect the company’s margins. A Brazilian market selloff also could impact ERJ shares.

Chart courtesy of www.stockcharts.com

U.S. COVID Deaths Near 1.028 Million

Aircraft stocks are closely affected by COVID-19 cases, deaths and lockdowns. As a result, it behooves investors to understand the latest trends.

U.S. COVID-19 deaths climbed for the second consecutive week by more than 3,000 to total 1,027,909, as of July 27, according to Johns Hopkins University. Cases in the United States jumped by nearly 900,000 for the second straight week to 90,735,621. America still holds the undesirable distinction as the country with the largest number of COVID-19 deaths and cases.

Worldwide COVID-19 deaths jumped by more than 14,600, down from 19,000, during the past week to reach 6,389,025 as of July 27, according to Johns Hopkins. Global COVID-19 cases rose more than 7.2 million during the last week, compared to 7.5 million the previous week, to hit 572,403,044 by July 27.

Roughly 78.7% of the U.S. population, or 261,204,035, have received at least one dose of a COVID-19 vaccine, as of July 20, the CDC reported. Fully vaccinated people total 222,950,194, or 67.2%, of America’s population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 107.5 million people, up 500,000 in the last week.

The six aircraft investments worthy of buying position investors to catch a lift from an industry that is revving up to climb. Amid the highest inflation in 42 years, a potential Fed rate hike of 0.75% and other rate increases predicted to follow, the flight plan for the six aircraft investments to buy is taking shape despite supply chain snags and Russia’s sustained attacks on Ukraine.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for multiple-book pricing.

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