Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The latest six-week period covered in our latest Industry Price Performance rankings was an unexceptional stretch for equities. The bull market continued to push ahead to new heights in November, but stock prices faltered in early December, leaving most of the leading market benchmarks showing modest gains for the period between October 29th and December 10th. From an industry perspective, winners narrowly edged losers over the past six weeks, and a fairly pedestrian advance of 5.1% was good enough to qualify for a spot in our top seven. The Shoe Industry rose 9.4% to take home the top spot. Other groups in demand among investors were Life Insurance (8.6%), Securities Brokerage (7.8%), Retail Automotive (7.2%), Steel (6.2%), Computers & Peripherals (5.7%), and Aerospace/Defense (5.1%).
In looking for investment ideas among these seven industries, we are taking a closer look this week at Aerospace/Defense stocks. The group’s strong performance of late is nothing new. Indeed, 2013 as a whole has been a very good year for investors in this space. Year-to-date, the median total return for this group exceeds 50%.
As is frequently the case, one of the sector’s more volatile, small capitalization stocks has rung up some of the biggest gains this year. Shares of Astronics (ATRO), a designer and manufacturer of control, lighting, and power systems, have more than doubled in price so far in 2013. The New York-based company is certainly having a strong year, with sales and earnings on track to rise 26% and 21%, respectively. Aside from its strong operating performance, the company’s appeal as a potential acquisition candidate by one of the larger players may well be contributing to its increased popularity with investors. That said, this equity is now trading at a lofty valuation (nearly 30-times earnings) that figures to be difficult to sustain over an extended period. In view of this, the stock’s primary appeal at the moment is likely to be with more speculative investors anticipating further developments on the mergers and acquisition front.
Elsewhere, the industry’s biggest names have hardly been shortchanging shareholders. Most notably, Boeing Company (BA) stock is up nearly 80% this year and now has a market capitalization of roughly $100 billion, more than double that of any other aerospace/defense stock. As with ATRO, though, we have concerns that the valuation on BA shares may have gotten ahead of itself. Granted, the operating performance of the Chicago-based jet manufacturer has been more than commendable of late. Most recently, September-quarter earnings rose 12% year over year, on an 11% increase in revenues. For the year, we look for share net to reach $5.80, up 14% from 2012, and we think per-share profits can continue to climb at a low double-digit clip in the upcoming year and out to 2016-2018. This is based, in part, on our view that rising rates of passenger air travel will push domestic and foreign airlines to replace their aging fleets with new aircraft.
Even with these generally favorable prospects, investors should proceed cautiously here, given the limited share-price appreciation potential we see for BA stock in the 3 to 5 years ahead. In particular, we have concerns that this equity’s P/E multiple, which now exceeds 20-times 12-month earnings, will retreat back into the mid-teens range where these shares have typically traded in recent years.
That said, investors focusing on price appreciation potential to 2016-2018 don’t have to completely swear off aerospace/defense stocks for the time being. For instance, shares of Spirit AeroSystems (SPR) have been on a tear this year (up about 90%) and still appear to offer worthwhile upside for the long term. Notably, the designer and manufacturer of aerostructures, such as fuselage, propulsion, and wing systems, has close ties to Boeing, generating more than 80% of its revenues from the aircraft giant. In fact, it operated under the Boeing umbrella before being sold in 2005 to Onyx Corp., the latter of which remains its largest shareholder.
Spirit Aerosystems is wrapping up a rather eventful year, in which it has revamped its management team (bringing in a new CEO and CFO) and announced plans to sell two plants in Oklahoma. Meanwhile, from an earnings perspective, the company will probably be glad to put 2013 behind it. Share net is likely to come in at $0.30, though profits would have been much higher were it not for second-quarter charges related to Gulfstream business jet programs. In the absence of such a setback, earnings should jump to $2.50 in 2014, a record high. Favorable fundamentals in the commercial aerospace industry ought to continue providing a backing wind beyond that, with annual profits likely reaching $3.50 a share or more in the 2016-2018 timeframe.
Given this positive long-term outlook and the current reasonable valuation (about 13-times 12-month earnings), investors here stand a good chance to be rewarded with above-average price appreciation in the 3 to 5 years ahead. On the downside, the stock can be rather volatile (Price Stability: 25 out of 100) and doesn’t pay a dividend. These attributes will likely limit its appeal with more-conservative investors.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.