Aerospace Players on a Joyride in 2013

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Last month Honeywell (NYSE: HON) signed a definitive agreement to buy Intermec for ~$600 million. Intermec is a leading provider of radio frequency solutions, mobile computing, bar codes, etc, to various industries. This acquisition is expected to be closed by the second quarter of 2013 and would double the overall Scanning & Mobility segment of Honeywell to ~$1.6 billion. It will also enhance Honeywell's reach into new segments such as voice recognition, barcode, radio frequency identification, and more. This deal will help Honeywell build a leading position in the AIDC (Automatic Identification and Data Capture) industry. This industry is currently worth about ~$4.5 billion globally and is growing at twice the rate of the global GDP growth rate. The industry expansion would surely boost up Honeywell's profitability after this acquisition. Talking about cost synergy, Honeywell is expected to achieve ~$60 million from this deal via SG&A combination.

Apart from this, another growth driver for Honeywell is its Aerospace segment, which contributes around 30% its sales. The company recently entered into a deal with the Boeing Company (NYSE: BA) to supply the parts for its new 737 Max Fleet. Although Honeywell is already a supplier for Boeing's existing models, this deal was an important win as the 737 Max is currently the fastest-selling model of Boeing. The737 Max will come with the latest EBAS (Electronic Bleed Air System) from Honeywell, which is a key factor in improving Aircraft’s effectiveness and convenience. Honeywell's new EBAS with its highly innovative features will also help in reducing the maintenance costs, as well as improving the fuel economy. However, the investors have to wait for the returns generating from this deal as it has no near term benefits until  it delivery starts in 2017.

On the other hand, the Boeing Company is already flooded with new orders for the 737 Max and has reached to a figure of around 1000 orders in just a year's time. This month, it received an order of ~60 737 Max airplanes from the Aviation Capital Group, an order worth ~$6 billion. This further shows the strong demand for the 737 Max in the airplane industry. The huge demand of the 737 is mainly thanks to its strengths in fuel efficiency and cost effectiveness over its nearest competitors. This is the first time when a single-aisle plane has recorded orders for 1000 units in a single year. I expect that the 737 Max series will be highly profitable for the company and will help in maintaining its leading position in the market.

Another strong player in the Aerospace industry is General Electric Company (NYSE: GE), which is also one of the largest supplier in this space. The company's aviation arm, GE Aviation, powers the Boeing 787 Dreamliner and the Boeing 747-8, which are the largest commercial aircrafts in the US. This gives an edge to GE among its competitors looking at the huge demand for these aircrafts. The company recently entered into a joint venture with Seacast to produce jet engine components. This deal will provide the much needed additional capacity to GE to speed up its production rates. GE will also benefit from the improved supply chain after this deal, as Seacast specializes in producing castings and other components. The overall increase in the purchasing power of the economies will drive the worldwide demand for the aircraft. This is a huge opportunity in front of GE, as their engines are most widely used in commercial aircrafts. Another positive area for GE would be its MRO (Maintenance, Repair and operations) segment. There has been an interesting trend of shifting of maintenance from the manufacturer to the suppliers. The customers now rely more on to suppliers for their routine servicing and maintenance, as the suppliers offer more specialized technologies. GE invests around $40 million annually in new repair technology development. This gives GE a huge opportunity to capture a higher share in this market too.

Summing up, I think all the three stocks discussed above are all set to gain from the expanding aviation sector around the world. The steady growth in the passenger traffic and improving profits of the airlines would benefit these suppliers and manufactures. Also, the forward annual dividend yield for these stocks remains attractive for the investors. 

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Forward Annual Dividend Yield</strong></p> </td> </tr> <tr> <td> <p>Honeywell</p> </td> <td> <p>2.5%</p> </td> </tr> <tr> <td> <p>Boeing Company</p> </td> <td> <p>2.5%</p> </td> </tr> <tr> <td> <p>General Electric</p> </td> <td> <p>3.6%</p> </td> </tr> </tbody> </table>

I believe this would be a good entry point for investors looking for long-term investments, as well as high dividend returns. I would recommend a buy rating on these stocks.


ShwetaDubey has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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