The global aerospace and defense sector suffered considerably amid the worst of the COVID-19 pandemic as numerous deals were shelved and significant logistical hurdles presented themselves. However, Russia’s invasion of Ukraine has led to record gains in this segment, with nations placing renewed emphasis on defense budgets. For example, Germany recently committed an additional 100 billion euros ($112.70 billion) to fund its armed services.
Furthermore, with the development of complex international diplomatic ties, the demand for military equipment modernization is expected to rise, benefiting the aerospace and defense industry. According to Report Linker, the global aerospace & defense market is slated to expand at an C8.5% CAGR of 8.5% until 2026.
Investors’ interest in the aerospace and defense space is evident in the iShares U.S. Aerospace & Defense ETF’s (ITA) 5.4% returns in the past three months versus the SPDR S&P 500 ETF Trust’s (SPY) 8.4% decline. Given this backdrop, Wall Street analysts expect fundamentally strong aerospace and defense stocks, The Boeing Company (BA), Spirit AeroSystems Holdings, Inc. (SPR), Embraer S.A. (ERJ), and CPI Aerostructures, Inc. (CVU) to deliver significant upside in the coming months.
The Boeing Company (BA)
BA designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, launch systems, and services worldwide. The Chicago-based company has four segments: Commercial Airplanes; Defense, Space & Security; Global Services; and Boeing Capital.
On Jan. 26, 2022, David Calhoun, BA President and CEO, said, “We increased 737 MAX production and deliveries and safely returned the 737 MAX to service in nearly all global markets. As the commercial market recovery gained traction, we generated robust commercial orders, including record freighter sales. Demonstrating progress in our overall recovery, we also returned to generating positive cash flow in the fourth quarter.”
BA’s loss from operations came in at $4.17 billion for the fourth quarter, ended Dec. 31, 2021, versus a $8.05 billion loss in the prior period, while its net loss came in at $4.14 billion compared to an $8.42 billion loss in the previous period. Also, its loss per share was $7.02, versus a $14.65 loss per share in the year-ago period.
Analysts expect BA’s revenue to grow 31.7% year-over-year to $82 billion in 2022. Its EPS is estimated to increase 133.6% to $3.17 in 2022. The stock closed yesterday’s trading session at $178.56. Wall Street analysts expect the stock to hit $256.56 in the near term, which indicates a potential 43.7% upside..
Spirit AeroSystems Holdings, Inc. (SPR)
SPR designs, engineers, manufactures and markets commercial aerostructures worldwide. It has three segments: Commercial; Defense & Space; and Aftermarket. It is one of the world's largest manufacturers of aerostructures for commercial airplanes, defense platforms, and business/regional jets. SPR is headquartered in Wichita, Kans.
On Feb. 2, 2022, Tom Gentile, SPR President, and CEO, said, “We successfully managed the company through another challenging year due to the COVID-19 pandemic. Our free cash flow was in line with our guidance of $(200) to $(300) million. We also made substantial progress on our diversification efforts, as highlighted by the announcement of new reporting segments and a new organizational structure.”
For the fourth quarter, ended Dec. 31, 2021, SPR’s total segment revenues came in at $1.07 billion, up 22.1% year-over-year. Its net loss was $120.30 million, compared to a $295.90 million loss in the previous period. Its loss per share came in at $1.15, compared to a $2.85 loss per share in the year-ago period.
SPR’s revenue is expected to be $6.54 billion in fiscal 2023, representing a 30.6% year-over-year rise. The company’s EPS is expected to increase by 484.6% to $2.5 in 2023. Over the past six months, the stock has gained 9.8% in price to close yesterday’s session at $42.66. Wall Street analysts expect the stock to hit $60.67 in the near term, which indicates a potential upside of 42.2%.
Embraer S.A. (ERJ)
Headquartered in São José dos Campos, Brazill, ERJ designs, develops, manufactures, and sells aircraft and systems in Brazil, North America, Latin America, the Asia Pacific, Brazil, Europe, and internationally. It operates through Defense and Security; Executive Jets; Service & Support; and Other segments.
On Jan. 26, 2022, ERJ reintegrated its commercial aviation business' main information technology systems and processes. Antonio Carlos Garcia, Executive Vice President of Finance and Investor Relations, said, “We believe that 2022 will be a year of growth, and we are well prepared to harness the full potential of the company.”
For the fourth quarter, ended Dec. 31, 2021, ERJ’s adjusted net income came in at $57.20 million, compared to a $12.50 million loss in the previous period. Its adjusted EPS came in at $0.31 compared to a $0.07 loss per share in the prior period. And its total liabilities were $7.38 billion, for the period ended December 31, 2021, compared to $7.61 billion for the period ended December 31, 2020.
For its fiscal year 2022, analysts expect ERJ’s revenue to be $5.33 billion, representing a 19.4% year-over-year rise. Its EPS is expected to increase 187.9% to $0.29 in 2022. Over the past year, the stock has gained 55.8% in price to close yesterday’s trading session at $13.26. Wall Street analysts expect the stock to hit $27 in the near term, which indicates a potential 103.6% upside..
CPI Aerostructures, Inc. (CVU)
CVU in Edgewood, N.Y., produces structural aircraft parts for fixed-wing aircraft and helicopters in the commercial and defense markets. The company also offers aero systems. It also operates as a subcontractor for defense contractors, commercial contractors, and the United States Department of Defense.
On Dec. 27, 2021, Douglas McCrosson, President and CEO, said, “As we head into 2022, we intend to remain focused on improving working capital management, strengthening our balance sheet through further debt reductions, increasing profit margins via improved operational efficiency, and lower SG&A costs like legal and accounting costs return to historical levels. We will also continue looking for opportunities to optimize our product mix and discontinue products and programs that cannot achieve a satisfactory margin.”
CVU’s revenue came in at $30.82 million for the first quarter, ended March 31, 2021, up 82.8% year-over-year. Its net income came in at $1.23 million, compared to a $3.36 million loss in the previous period, while its EPS came in at $0.10, compared to a $0.29loss per share.
CVU’s revenue is expected to come in at $105.30 million, increasing at the rate of 4.8% in fiscal 2022. Its EPS is also estimated to increase by 11.4% to $0.39 in 2022. It surpassed EPS estimates in three of the trailing four quarters. The stock has gained 15% in price over the past month to close yesterday’s trading session at $2.68. Wall Street analysts expect the stock to hit $4 in the near term, which indicates a potential upside of 48.7%.
BA shares were trading at $176.71 per share on Thursday morning, down $1.85 (-1.04%). Year-to-date, BA has declined -12.22%, versus a -11.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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