After Berkshire Hathaway Inc. (NYSE: BRK.B) has acquired the aerospace supplier Precision Castparts Corp. (NYSE: PCP) for $37.2 billion, which is Warren Buffet’s largest deal ever, we wanted to take a look at the aerospace industry and the leading companies in it. The global aerospace & defense industry is currently going through a notable commercial growth phase. Some of the factors contributing to this growth are higher air traffic rates caused by a stronger Global economy, continues improvements in cargo traffic systems, as well as new innovative technologies such as more fuel efficient jet engines which resulted in a chain of numerous large quantity orders of new airplanes by airline companies around the world.
In the United States the company that has been famously enjoying such orders over the last three years is Boeing (NYSE: BA), which is a customer of Precision Castparts. Here is the list of orders from the last two month - in June, Boeing received an order for 161 new commercial jets from AerCap Holdings N.V. (NYSE: AER) an independent aircraft leasing company, Paris Air Show is committed on getting 20 units of 747 jets, Israeli airline El Al will buy and lease up to 15 new Dreamliner aircrafts, and FedEx (NYSE: FDX) has placed an order for 50 units of the 767 aircraft.
Airbus - the ‘European Boeing’ and Boeing’s biggest competitor, is also a customer of Precision Castparts. The company is slightly behind when it comes to new airplane orders, yet the numbers are no less than encouraging. Airbus does perform well, showing consistent growth over the last three years despite some financial difficulties in Europe. Airbus’s total orders since the beginning of 2015 currently stand on 367 new airplanes, comparing to 380 from Boeing. In addition, there have been rumors that if the Iran nuclear deal goes through, Iran will order 90 planes a year from Boeing and Airbus once trade sanctions are lifted.
Looking back at 2014, Boeing delivered a record of 723 new commercial airplanes to airline companies worldwide, surpassing Airbus’s 629 airplanes. Boeing reported that they expect to deliver between 750 and 755 airplanes in 2015.
It is important to distinguish between the aerospace and the airline industry. While both industries depend on air travel demand, the airline industry profits from ticket prices and high service expectations while the aerospace industry benefits from high aircraft and/or spacecraft building rates. Besides the companies that actually build the planes, those in the supply chain also benefit from aerospace growth, which is where Precision Castparts comes into play. The company is a worldwide manufacturer of complex metal and forged components for airplane and jet engines. Below is a representation of company’s sales and earnings over the last five years:
Another aerospace supplier is B/E Aerospace (NASDAQ: BEAV) a manufacturer of cabin interior products for commercial aircrafts and business jets. Despite a tough year with operation complications the company still is considered to have a high growth potential, as analysts have forecasted a five-year EPS growth of 23%.
Economic growth is the primary contributor to aerospace and aviation industry growth. Even though global political tensions remain a concern a report from Boeing indicates that economic growth in the United States, which is measured by gross domestic product (GDP) is forecasted to rise 3.2% over the next 20 years, which will drive passenger traffic to grow 5.0% annually and cargo traffic (which also depends on globaltrade) to grow 4.7% annually.