Research in Action: Changing Flights on Aerospace Stocks

May 9, 2014 12:32 PM
By Rama Bondada

Now that some of the world's leading aircraft manufacturers have had quite a run over the last two years, certain aftermarket companies appear more attractive.  

For an aerospace and defense analyst, there's nothing like watching mega cap stocks jump 80%. That's what two leading aerospace companies did over the last two years, thanks to sharply higher demand from emerging markets; a healthier airline industry; and dramatic improvements in lightweight composite materials, fuel efficiency, and avionics.

While the order backlog for major aerospace companies remains strong, the two biggest manufacturers have held the rate of production flat to give the rest of the supply chain a chance to catch up. As a result, I’ve shifted my focus to aftermarket companies that supply a wide variety of high-margin products that remain very much in demand. 

Aftermarket companies are not only seeing increased sales volumes, but also greater pricing power on replacement parts (like seatbelts and overhead luggage compartments) and bigger margin increases, which of course goes straight to the bottom line.  

All of which illustrates one of the six growth rivers driving Lord Abbett Growth Leaders Fund. See "Why American Manufacturing Is a Deep Growth River."

The rebound in American manufacturing may have benefitted some stocks. Will that drive improvement in other parts of the economy? Tell us what you think. 

Lord Abbett Research Analyst Rama Bondada covers the the aerospace and defense sectors.

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