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3 Aerospace Firms Trading at Attractive Valuations

We think demand will remain solid for narrow-body aircraft, with Airbus Group, United Technologies, and Safran leading the way.

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Chris Higgins: This year marks the start of an unprecedented production increase in narrow-body passenger aircraft like the Airbus A320 and Boeing 737, a category that is a major profit-driver within the commercial aerospace upcycle. Although investor sentiment reflects ever-deepening worries over a possible aerospace downturn, we think demand will remain solid. We've highlighted three firms with economic moats trading at attractive valuations: Airbus Group, United Technologies, and Safran.

Airbus and Boeing will capture 90% of the narrow-body market through 2035 thanks to the introduction of new engines on their A320 and 737 aircraft. However, Boeing's lagging order book means Airbus enjoys an advantage.

United Technologies' Pratt & Whitney unit and CFM International (a GE/Safran joint venture) are providing these aircraft with their new engines. Pratt is producing the Geared Turbofan engine for the A320neo, while Safran is manufacturing the LEAP engine for both the A320neo and 737 Max.

We expect that Pratt will challenge the incumbent CFM International in the narrow-body engine market. After $10 billion of R&D, the Geared Turbofan offers an innovative but unproven design. In contrast, CFM has developed its LEAP engine leveraging existing technology. Both companies face steep industrial ramp-ups, one that will be particularly challenging for Pratt, as evidenced by some of its recent production hiccups.

We believe that United Technologies' and Safran's shares fail to reflect the long-term profit potential of the engine aftermarket because of a market consensus built around near-term earnings. We also think Airbus Group investors will come off the sidelines as the A320 production ramp-up adds billions to profits and as capital outlays on other programs taper off.

Chris Higgins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.