BA shares yesterday lead a surge on the London Stock Exchange (FTSE 100) as traffic figures confirmed a good growth margin of 4.3% in premium traffic (see Aviation News for September 29, 2010). BA shares climbed 15.5p to 254.6p on the news on heavy trading. Not far behind this was TUi Travel which climbed 9.1p to 225.9p on the news that holiday bookings for summer 2011 were strong at this stage. In the US, shares of United Continental rose 56 cents, or 2.3 percent, to $24.66 in midday trading yesterday. US Airways Group reported strong growth at its namesake operations last month compared with a year earlier, continuing a recent trend at the carrier.
Last week in this section I mentioned the bravery of one large Hong Kong investor who was going long on airline shares, this was an indication that there is a great deal of short term gain to be had as the airlines rebound. I have been informed that this rebound will not last and there is indeed a real possibility of a significant slowdown for many during the winter period. As mentioned last week though the very strong rebound in business/premium travel is likely to see many airlines such as BA ride out the impending fall in economy traffic over the next 15 months.
Other than the obvious under valued airlines such as Ryanair, it would be wise to cast your eye across other sectors of the aerospace industry. Boeing, whose shares have been up and down like a yo-yo of late, gained 3.87% to close at 68.90 on the Dow Industrial Average as the pendulum once again swung in their favour and they secured another good 737-800 order from the APAC region (see news below).
But the company to watch is United Technologies. United Technologies is one of those giants that sits in the background covering a myriad of sectors like GE and Siemens but which does not have the brand impact of those companies. This keeps it out of sight and out of mind but take a look as the shares show value and if, as we are sure, Airbus is going to confirm that the re-engined A320 is to be fully launched then the share price will show dramatic value, due of course in part to the Pratt & Whitney geared turbo fan engine which would compete with the CFM Leap X for orders.
United Technologies generates more than half of its revenue outside the US and the commercial and industrial segments of the company account for nearly 60% of 2009's sales, versus 42% for aerospace. And a little more than 40% of sales came from the lucrative aftermarket businesses—spare parts, repairs, maintenance and overhauls–rather than from original-equipment manufacture. So the launch of the A320 re-engined version will be solid growth on the books. "They don't have one big item that's going to knock them out of the water," says Howard Rubel, an analyst at Jefferies & Co. He rates the stock a Buy, with a 12-month price target of 88, more than 20% above its recent price. And while the company's fortunes are tied to the health of the global economy, United Technologies' ability to generate double-digit earnings in all kinds of economies–even a sluggish one—should keep its profits rising. One investor of note; Eric Schoenstein, a co-portfolio manager at the Jensen Fund (JENSX), which holds United Technologies (UTC) stock is sure that this is a winner. Schoenstein views UTC as a bargain at its current price. The diversified manufacturer fetches a reasonable 13.4 times the $5.33 a share that analysts expect it to earn next year, roughly in line with the broader market. But the company "could grow earnings 20%-30% faster than the market, and it should command a premium," says Rubel. And while investors are waiting for the economy to recover, the industrial giant offers a healthy dividend yield of about 2.4%.
Although management lowered its guidance for this year's revenue to $54 billion, the lower end of its previous range, it did boost its earnings range to $4.60 to $4.70 a share, versus $4.50 to $4.65 previously. The balance sheet looks solid, with debt a manageable 37% of capital as of June 30. And the company's second-quarter free cash flow totalled nearly $1.25 billion.
At this point it is important to mention that no one, not even the heads of global derivatives trading at the world’s top banks, know where the economic cycle is at this time – “We could have deflation, inflation, stagnation, depression, recession or grow” one global head of desk told me yesterday. As long as interest rates are kept close to zero and the central banks keep printing money we should stay out of trouble. The question is how long can this situation carry on? If you can answer that then you should be with the IMF. The short and long of it all is this: No one knows if we are heading up or down everyone is taking the global situation one order at a time.