The Motley Fool

Why I think aviation OEM stocks are looking cheap

Image source: Getty Images.

On 19 March 2020, shares in The Boeing Company (NYSE: BA) hit $98. Only six months earlier they had been trading at a 52-week high of $388. At the time of writing, the Rolls Royce (LSE: RR) share price has also hit a 52-week low of £321, down from its high of £937.  But have short sellers ‘over shot’ the runway and left these original equipment manufacturers under-priced, or is this short selling an accurate reflection of the new reality for aviation original equipment manufacturer (OEM) stocks?

The world is now in a Covid-19 lockdown that has airlines grounding planes and seeking taxpayer bailouts. easyJet has grounded all of its aircraft until June at the earliest, and its major shareholder is advocating the cancellation of a £4.5bn order for 107 aircraft. easyJet is trading at one-third of its 52-week high. Shares in IAG have fallen to £2 from a 52-week high of £6.57 in January. And shares in AerCap Holdings, the world’s largest aircraft leasing company (which leases over 1,000 aircraft to 200 airline customers in 80 countries), hit an all-time low of $15 on 18 March, down from a 52-week high of $64.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Are aviation stocks good value now?

Whilst all of these stocks now look like very good value, my view is that airlines and aircraft leasing companies face a future turmoil that makes them very risky buys. But I believe the short-term turmoil that OEMs will face will be short lived. So I have been incrementally taking a long position in The Boeing Company since its mid-March low. 

So why my optimism about OEMs? Firstly, because the worldwide macro trend is toward more air travel. Projections for commercial air travel remain optimistic across all regions of the world. The global aircraft fleet is expected to grow from 27,492 in 2019 to 39,175 by 2029, an increase of more than 11,600 thanks to burgeoning demand from high-growth populations in Asia, in particular from the new middle class in India and China. The bulk of this fleet expansion will be narrow body jets produced by the Boeing and AirBus duopoly.

The Boeing Company is a long-term play, because whilst the company has an order backlog of 4,300 planes, it also has plenty of unresolved headwinds. Its 737 MAX narrow body jet, which was supposed to be Boeing’s cash cow, has been grounded since March 2019 following two fatal crashes. Even before the Covid-19 crisis took hold, Boeing reported negative net orders in February 2020 after 46 cancellations. And airline customers such as Southwest Airlines, which has 310 narrow body planes on order, have said that they might slow or defer some orders in the wake of Covid-19. Others may also do the same.

Plane spotting

But in my view, even in the wake of Covid-19, long-term travel demand is not going to cease. The long-term growth trends will continue unabated. The airlines may change. We may see aviation stocks collapse and bailouts. We might even see new airlines. But the OEM duopoly of Airbus and Boeing should persist, especially if Boeing is able to get its 737 MAX back into the skies.

At its 52-week high, The Boeing Company might have looked like a poor investment. At its current price I believe it is a good value buy to hold for the long term. 

The same can be said about Rolls Royce. The company has been posting losses since 2018 after design glitches in its Trent 1000 engine meant that it had to put £2.4bn aside for repairs.  Yet much like Boeing, Rolls Royce occupies an entrenched position in the market.

It has endured a restructuring and has reduced its average loss on engine sales. What’s more, it has reduced its overall losses from £2.9bn in 2018 to £850m in 2019. It has an order back log of over 2,000 engines.  And even if orders slow in the near term due to Covid-19, there will be a day when Rolls Royce is past its Trent 1000 problems and exploiting its privileged position to provide engines for the 11,600 commercial aircraft that will enter service during the next decade.

Rolls Royce used to regularly post profits of £3bn to £5bn.  It should get there again.  And at its current price, Roll Royce looks like good value to buy and then hold until it does.  

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Tej Kohli owns shares in The Boeing Company. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.