Industrial Stocks Soar Higher On Aviation

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General Electric (NYSE: GE) posted a strong fourth quarter earnings report in January showing strong results from its industrial sector.  In particular GE Aviation posted strong results and looks poised to continue to drive revenue and profits for GE deep into the future.  The company posted an increase of 13% on earnings per share on top of 4% growth in revenue.  The aviation segment produced an 11% increase in revenue and 22% growth in earnings.  I expect GE to continue showing solid growth throughout 2013 with GE Aviation leading the way.

Earnings at GE Aviation have benefited from rising passenger traffic.  Earnings at GE Aviation for the most recent quarter increased 22% to a little more than $1 billion helping GE see an earnings rise of 13%.  A market outlook report released in the summer of 2012 projects 34,000 new airplanes will be built in the next 20 years as the current world fleet will double in size.  Rising demand in emerging markets is leading the boom but there is also a push to replace older planes with newer more efficient models.  As the market leader in aviation engine production GE will see significant growth from its aviation division.

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GE Aviation’s market share is projected to remain fairly stable over the next few years at around 25%.  For 2013 the company expects to produce 3,600 engines this year, a 6% increase.  Over the next 7 years the company expects to have 60% more engines in service than it has today.

The aviation market is dominated by three companies; General Electric through its subsidiary GE Aviation, United Technologies (NYSE: UTX) through its subsidiary Pratt & Whitney, and Rolls Royce (NASDAQOTH: RYCEY).  All three companies design, manufacture, and sell engines and other aviation components along with the maintenance and repair of those components.  Pratt & Whitney saw its revenue increase 12% in the most recent quarter but saw a 30% decline in earnings while its parent saw a 55% rise in earnings.  This decline by Pratt & Whitney is attributed to weaker military and commercial jet sales.  Rolls Royce saw profits increase 24% with much of that coming from increased orders from the commercial airline industry. 

Within the large wide body jet market GE maintains a market share of 50%.

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This market is composed of the large commercial jets that the big international airlines use for long distance flights.  EADF’s (EAD.F) Airbus and Boeing (NYSE: BA) make virtually all the airplanes in this market.  Going forward this market is expected to see modest growth in the coming years with roughly 800 new jets coming to market over the next 20 years with a value of $300 billion. 

The bulk of the aviation’s sector growth is going to come from the over 23,000 single aisle planes that are projected to be built over the next 20 years with a value well in excess of $2 trillion.  GE is well-positioned in this market with successful engine lines like the LEAP series which are powering several Boeing and Airbus models.  The LEAP engine is designed to produce the efficiency found in the jumbo jet engines to the single aisle aircraft that are going to be in such high demand in the coming years.  It is designed with new features and materials that reduce weight and reduce fuels costs.  The company estimates that the engines will shave $12 million per plane over a period of 15 years compared to current engines.  The biggest innovation appears to be the use of ceramic matrix composites, a material that has been in the works for two decades.  These composites are as strong and durable as the nickel alloys that are currently used in engines but can be operated at far higher temperatures making the engine much more efficient.

These LEAP series of engines is already a success.  More than 4,000 have already been sold.  The engines will power the future Airbus A320 and Boeing 737 airplanes.  There are also new planes in development – like the Airbus A320neo, Boeing 737 MAX, and the COMAC C919 from China. 

GE Aviation looks to have hit a homerun with the LEAP engine being developed just in time for the massive uptick in single aisle airplane orders.  The superior reliability and efficiency of the newer engines have made it an attractive choice for aircraft manufacturers and will continue to do so.  Rival Rolls Royce has just recently begun to play catch-up as it tries to develop its Trent XWB engine as an efficient and reliable engine for the smaller body jets.  The company hopes that it can begin to compete with GE’s LEAP, but GE has such a head start (already having 4,000 engines ordered) that it appears very difficult for Rolls Royce to take back any sort of momentum. UTX’s Pratt &Whitney is also unveiling a new, efficient engine, the PurePower engine.  This looks to be a solid competitor to GE’s LEAP, but it suffers from being behind the curve as well.  The LEAP has been produced for a couple of years now and has been ordered by both of the big manufacturers while GE’s competitors are just getting their new generation of engines off the ground.  It’s a big lead GE has at the moment.

With the lead GE has over its competitors in developing the next generation of engines for single aisle aircraft, along with the tremendous growth in the aviation field over the next two decades, GE is going to see huge returns from its aviation division.  This means that GE is at worst a safe bet for investors wanting in on a well-diversified giant.  More likely, though, the aviation sector will be the leading catalyst in solid 20%+ growth over the next year.

StockCroc1 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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