Three Aviation Stocks to Buy Amid Consolidation

Three aviation stocks to buy amid consolidation allow investors to profit along with the companies that are poised for survival.

The three aviation stocks to buy amid consolidation are expected to gain increased value as some of their competitors are acquired and reduce competition.  Each of the three aviation stocks is taking a somewhat different path to pursue enhanced profitability.

Demand in the United States is on the rise due to its national security doctrine that aims to use military modernization to deter adversaries, while European countries’ NATO budgets are increasing to keep the countries in good standing with the alliance, according to a recent research report by Citigroup. Many aviation companies serve both commercial and military customers. The latter segment is showing growth as demand for defense-related products parts is surging with Russia’s war against Ukraine and the conflict in the Middle East between Israel and Hamas militants based in Gaza.

Three Aviation Stocks to Buy Amid Consolidation: Rising Demand

Company backlogs have grown in the past three years, Citigroup wrote. Profit margins are likely to rise as new bookings reflect the current cost and supply chain environment, Citigroup continued.

“Look to invest in companies with accelerating revenue growth and margin expansion,” the report continued.

Bob Carlson, a former pension fund chairman who heads the Retirement Watch investment newsletter, suggested that investors consider exchange-traded funds (ETFs) focus on the aviation and defense sector. Many of the investments Carlson recommends in his newsletter feature funds.

Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.

Three Aviation Stocks to Buy Amid Consolidation: General Electric (GE)

General Electric Company (NYSE: GE) has been spinning off business units such as GE Aerospace, formerly known as GE Aviation. The GE Aerospace executives offered guidance in March 2024 that the business unit that began operating with the ticker symbol GE on April 2 would earn more than $6 billion in operating profits this year with the total rising 66.77% to reach $10 billion in 2028.

The Citigroup investment firm set a 12-month price target of $186 that is derived using a 21.5X enterprise value (EV)/ earnings before interest, taxes, depreciation and amortization (EBITDA) multiple on its estimates one year from now. That multiple is an average EV/EBITDA of comparable companies, Citigroup wrote.

Chart courtesy of www.stockcharts.com

“The commercial aerospace industry is intrinsically risky given its vulnerability to unpredictable shocks that cannot be incorporated into earnings models, such as terrorism, volatile oil prices and epidemics (COVID / SARS), Citigroup wrote. “Further, the industry is highly correlated to economic growth, and relies on economic expansion for air traffic growth.”

Evendale, Ohio-based GE Aerospace’s exposure to the defense market is affected by changes in political will, global threats to the United States and its allies, the state of the federal budget, and the condition of existing U.S. and allied military equipment, Citigroup wrote. GE’s shares may underperform Citigroup’s target price if the economy enters a prolonged recession that results in decreased airline traffic and plane orders.  Shares would could underperform if global peace broke out and DoD budgets were severely cut, but the latter possibility seems remote with wars raging in Europe, the Middle East and Africa.

GE Aerospace plans to hire 900 engineers this year to support existing are aircraft engine programs and develop new technologies, company official said. In 2023, GE Aerospace spent approximately $2.3 billion on aviation research and development, including external customer and partner funding.

Three Aviation Stocks to Buy Amid Consolidation: TransDigm (NYSE: TDG)

TransDigm Group Incorporated (NYSE: TDG), a Cleveland-based global designer, producer and supplier of highly engineered aircraft components, is strengthening from rising demand. The result is that the company beat consensus analysts’ estimates and raised its guidance after its latest earnings report on Tuesday, May 7.

The company’s commercial aftermarket growth rate slowed a bit to 8% in the second quarter from 25% in the first quarter due to a decline in freight revenue, while passenger transport remained strong, wrote Louie DiPalma, an aerospace and defense analyst with Chicago-based William Blair & Co. TransDigm’s management reiterated its guidance for 15% commercial aftermarket revenue growth, implying a reacceleration in the second half, DiPalma wrote. The company’s management indicated that aftermarket demand remains robust.

Chart courtesy of www.stockcharts.com

Aviation Stocks to Buy Amid Consolidation: ‘Long Runway’ Ahead

TransDigm executives forecast a “long runway for growth” as demand for travel climbs, surpassing pre-pandemic levels for the first time, DiPalma continued. Defense revenue showed strength in the last quarter, outperforming expectations on improved defense outlays, he added.

TransDigm raised its full-year guidance for consolidated revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), reflecting its outperformance in the defense market, DiPalma wrote.

“We expect that depressed aircraft production over the past three years, combined with revenge travel, will result in an aviation aftermarket supercycle for the next decade,” DiPalma continued. “Airlines will continue to extend the lives of aging aircraft with spare parts to accommodate the robust travel demand coming out of the pandemic, driving steady growth for the aftermarket parts and services industry. TransDigm has taken advantage of the slowdown in new aircraft deliveries and aging aircraft fleets, which have increasing needs for reliable replacement parts.”

The various financial “tailwinds” will support TransDigm’s earnings growth and provide upside to its historical valuation, DiPalma wrote. Thus, DiPalma reaffirmed his “outperform” rating for TransDigm.

Aviation Stocks to Buy Amid Consolidation: VSE Corp. (Nasdaq: VSEC)

VSE Corporation (Nasdaq: VSEC), of Alexandria, Virginia, recently completed a secondary stock offering as it positions itself for expansion in the fragmented aftermarket aerospace industry, DiPalma wrote. Following the offering, DiPalma revised VSE’s projected net leverage to 3.3 times at the end of the second quarter, compared to 4.1 times net leverage in the second quarter before the offering.

“We see greater than 15% upside to shares based on our expectation for accretive M&A activity, multiple expansion and EBITDA growth,” DiPalma wrote. “Accordingly, we reaffirm our outperform rating.”

Using the new share count of 18.4 million,  VSE shares trade at 10.7 times William Blair’s 2025 adjusted EBITDA estimate, compared with industry peers and M&A comparable numbers in the 9- to 14-times range, DiPalma wrote. The investment firm forecasts VSE’s multiple will expand as it closes the divestiture of its federal and defense business and makes strategic acquisitions.

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VSE is a provider of aftermarket distribution and repair services that operates through its two key segments. The company seeks to significantly enhance the productivity and longevity of its customers’ high-value, business-critical assets.

To that end, VSE’s Aviation segment provides aftermarket parts distribution and maintenance, repair and overhaul services for components and engine accessories to commercial, business and general aviation operators. The company’s Fleet segment specializes in part distribution, engineering solutions and supply chain management services for the medium and heavy-duty fleet market.

Geopolitical Risk Rises in Rafah

The chief prosecutor of the world’s top war crimes court announced on Monday, May 20, that he is seeking arrest warrants for top leaders of Israel and Hamas for “crimes” committed during their ongoing seven-month war. Israel’s Prime Minister Benjamin Netanyahu, his Defense Minister Yoav Gallant and Hamas leaders Yehia Sinwar, Mohammed Deif and Ismail Haniyeh. each was accused of war crimes, along with crimes against humanity, in Gaza and Israel, respectively.

Netanyahu called the prosecutor’s accusations against him a “disgrace,” and an attack on the Israeli military and all of Israel. He vowed to press ahead with Israel’s war against Hamas and keep seeking the freedom of the hostages taken during an Oct. 7 attack against Israel.

Israel is continuing its efforts to find and destroy an extensive tunnel system in neighboring Gaza that has been used to stockpile weapons, as well as hide the Hamas leaders and militants who were responsible for the Oct. 7 attack in Israel that killed an estimated 1,200 people and took 240 hostages into Gaza. The battle is expanding in Rafah, where Hamas militants have hunkered down in the midst of a large civilian population that heightens the risk to human life

The Gaza Ministry of Health estimates that a total of more than 35,000 Hamas fighters and civilians have lost their lives since the war began Oct. 7.

President Biden issued a statement describing the ICC prosecutor’s application for arrest warrants against Israeli leaders as outrageous.

“Whatever this prosecutor might imply, there is no equivalence — none — between Israel and Hamas,” Biden said in his statement. “We will always stand with Israel against threats to its security.”

Russia Keeps Pushing Forward in Ukraine

Russian forces have been penetrating the border area near Kharkiv, Ukraine’s second largest city. Those invaders have since gained control of a number of villages on Ukraine’s northeastern section, while advancing further against outnumbered and outgunned forces.

Russia’s leaders have adopted a “meat grinder” war strategy of sending overwhelming waves of soldiers forward to wear down Ukrainian forces and expose their locations to kill as many of the defenders as possible. An overall death toll of more than 50,000, estimated by the BBC, is eight times higher than the only official public acknowledgement of fatality numbers released by Russia in September 2022.

The three aviation stocks to buy amid consolidation show strong demand amid ongoing wars and increased travel. Investors who want to profit can ride those opportunities and the tailwinds that push them forward.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus 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. Special Sale! Paul 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 uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for reduced pricing on multiple-book purchases.