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Why This $5.6 Trillion Investor Profit Boom Is Set To Take Off

Companies / Sector Analysis Jul 02, 2015 - 03:11 PM GMT

By: ...

Companies

MoneyMorning.com Michael A. Robinson writes: Last week’s 51st Bi-annual Paris Air Show was the event of the year for the Aerospace industry.

Held in Le Bourget Airport in Paris, France, this prestigious air show has brought together industry leaders from across the globe to hunt for new commercial opportunities – and over 2115 exhibitors marketing their latest and greatest projects – for the last century.


As the largest, and longest-running, aerospace trade show in the world, the Paris Air Show features companies from over 44 different countries, 285 official delegations, 3,100 international journalists and nearly 139,000 professionals’ year-over-year.

But you don’t have to be perusing the Parisian halls of Le Bourget to be a part of the action.

For investors, like us, the Paris Air Show is a tipping point for the entire aviation industry. Investors look at this week-long battle royale as a make-it-or-break-it moment to see who will be the leaders in this highly competitive industry and who is likely to come up short.

I’ve been telling you for two years now that we are in the midst of the largest aviation boom in history. An industry that analysts believe could soon topple $5.6 trillion in the next few years.

No doubt, that’s a big number. But it greatly understates the potential that tech investors can find in aviation-related plays.

And today, I’m going to show you not only how you can profit from that boom, but I’ll reveal the one investment that balances safety and stunning market-beating returns.  JUMP LINE

Up, Up and Away

If you listened to Wall Street, the 2015 Paris Air Show was destined to be a bust for Americas leading commercial jet makers.

Just take a look at what analysts were projecting for the world’s leading aircraft maker, Boeing Co. (NYSE: BA).

The Street projected Boeing would walk away from the show with meager sales of around 200 jets.

To put that number in perspective, 200 jets would have been roughly half of what it received in the 2013 show after unveiling the new flagship 787 Dreamliner.

If you’ve been following this industry as long as I have, you know how ludicrous that number is.

We’re talking about a company who received 5,700 commercial orders worth $495 billion in the first quarter of 2015 alone.

You can see why it wasn’t a surprise to me when Boeing completely skyrocketed past the Street’s expectation and left the Paris Air Show with over 335 orders, worth around $50.6 billion.

I give a lot of attention to aircraft orders and events like the Paris Air Show for one reason. The aviation industry is reliant on new and innovative pieces of high-tech.

We’re talking everything from sensors and semiconductors, digital radars, Wi-Fi connectivity, advanced cockpit electronics and more.

Despite falling fuel costs, global airlines are rapidly replacing their aging fleets with more fuel-efficient, tech-laden crafts.

And the skies are busier than ever. The International Air Transport Association (IATA) says that in March, global air passenger traffic rose 7.4% compared to the same month a year ago.

Not to mention, Boeing recently updated its 20-year forecast to show a 3.5% increase from last year. The company is now projecting that over the next 20 years, global demand will reach 38,000 aircrafts, making it worth acombined$5.6 trillion.

But that is just the tip of the iceberg.

That number doesn’t even include forecast for sales for major defense contractors like Lockheed Marin Corp. (NYSE: LMT), which is in the midst of launching the F35 Lightning fighter jet. Or Boeing rival, Airbus Group (OTC: EADSY) who left the airshow with over $57 billion in new orders.

And investing in these powerhouse jet makers isn’t the only way investors can profit. When you take into account supply firms that provide electronics and tech components, engines, subassemblies, and advanced materials, that $5.6 trillion doesn’t even come close to the sort of profits investors will be seeing from this industry.

That’s why the iShares US Aerospace & Defense ETF (NYSE: ITA) is a great way to pull in hefty profits from the entire aviation boom.

The One-Stop Shop

The beauty of this ETF is that it positions you to profit from just about every aspect of the aviation sector. With nearly 40 stocks in its portfolio, ITA includes aircraft makers, component suppliers, electronics firms and much more.

Boeing and Lockheed are the fund’s two biggest investments. Together, they account for more than 16% of the fund’s holdings.

And these two stocks reflect another key aspect of ITA – it offers investors a balance between commercial aerospace and defense stocks, which make up about 45% of the fund’s overall holdings.

ITA is composed of proven winners with strong cash flow and solid earnings. I’m talking about such firms as:

  • Esterline Technologies Corp. (NYSE: ESL). Over the past several years, the company has expanded through a combination of organic growth and acquisitions. It sells avionics, in-flight GPS, head-up displays for pilots, enhanced vision systems, and electronic flight management systems. With a $3 billion market cap, ESL has 12% operating margins and an 8% return on equity.
  • Hexcel Corp. (NYSE: HXL). A supplier of advanced honeycomb composites, the small-cap firm counts Boeing and arch-rival Airbus as key clients. The company has a backlog of orders for jetliners that would take it roughly eight years to complete. With a $5 billion market cap, Hexcel recently grew its quarterly earnings by 36% and has 17% operating margins and a 19% return on equity.
  • Raytheon Co. (NYSE: RTN). This defense contractor recently announced it will spend roughly $1.7 billion to grow its cybersecurity business in the wake of the staggering increase in cybercrime. The company also provides the Pentagon with capabilities for electronic warfare, laser rangefinders, military training and advanced radar. RTN currently has a $30 billion market cap, a 20% return on equity and 13.5% operating margins.
  • TransDigm Group Inc. (NYSE: TDG) builds airframe segments, cockpit security components and audio systems. With a $9 billion market cap, TDG has operating margins of 40%. It had recent quarterly earnings growth of 22.7% and generated free cash flow last year of $295million.
  • United Technologies Corp. (NYSE: UTX) supplies flight control systems, power management and jet engines to major airlines. With a market cap of $103 billion, it has operating margins of 15.5% and a 21% return on equity. It grew earnings last quarter by 17.6% and last year it generated $5 billion in free cash.

With this one investment, we benefit from the entire sector’s growth while at the same time reducing the risk associated with investing in one stock at a time.

Trading at about $124, this ETF has greatly outperformed the broader market so far this year.

Since 2015, ITA has gained roughly 7.8%. Those gains are 178.5% higher than the S&P 500‘s return of 2.8% over the same period.

This is the kind of foundational play that lowers your risk of buying individual stocks while at the time really building your net worth.

You’ll find, over time, that this is exactly the type of solid base that puts you on the road to wealth.

I’ll see you next week.

[Editors Note: Commercial airlines aren’t the only aerospace sector I’m keeping a close eye on. Recently the USA Today  asked for my insights into  the SpaceX Falcon 9 explosion and what effect it will have on the pioneer aerospace company. You can read the full article here.]

Source :http://strategictechinvestor.com/2015/07/why-this-5-6-trillion-profit-boom-is-set-to-take-off/

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