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Stock Analyst Update

3 Stocks That'll Benefit From the Narrow-Body Upcycle

Larger wide-body jets remain a concern for the likes of Boeing and Airbus, but narrow bodies look more secure.

Aerospace data firm Ascend recently hosted an update on the aerospace market. The company was sanguine on current market dynamics but warned that indicators are flashing orange. Our nuanced view posits that larger wide-body jets remain the biggest concern for Boeing and Airbus, but that narrow bodies look more secure. Regional jet growth looks underwhelming, but Embraer still enjoys a commanding position. We point to Airbus, Safran, and United Technologies as the three names that will benefit most from the narrow-body upcycle.

This year will see flat to declining commercial jet backlogs for the first time since 2009. But we don’t see order weakness as a reason to panic, particularly in narrow bodies. According to Ascend, narrow-body backlogs cover planned production rate increases to about 60 aircraft per month through the end of this decade, giving us comfort that rates will move up. Backlogs represent 9.5 years of production, and this cushion combined with hundreds of A320 and 737 operators provides manufacturers with potent risk-management levers. We note that manufacturers put these levers to good use in 2009-11, moving delivery rates up in the face of weak demand. In addition, Ascend displayed data showing a healthy narrow-body lease market, with used values still slightly above fundamental values.

As we argued previously, the wide-body market is vulnerable because of faltering demand, excess capacity on international routes, and a wave of A330s and 777s potentially coming off-lease over the next few years. According to Ascend, open wide-body slots begin materializing as soon as 2018. The Boeing 777 drives this gap between production plans and backlogs. These 777 challenges plus a more mature 787 ramp up puts Boeing in a difficult spot with its wide bodies. Year-to-date demand for wide bodies has been underwhelming with a book to bill of just under 0.6 for Boeing and Airbus.  

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