Aerospace Is Ready to Fly

Oil's surge is demand-driven; it's a byproduct of fast-growing emerging-market economies. And global GDP growth leads to increasing air travel, which eventually spurs more aircraft orders. Airline margins are the key indicator of future aircraft orders, and economic growth (more than fuel prices) is the more important factor to airline profitability.

Further, next-generation airplanes like Boeing's (BA - commentary - Cramer's Take) 787 are as much as 20% more fuel-efficient than their predecessors, so high fuel prices increase the need to replace older planes with more economical ones.

Even with the U.S. economy stalling, aircraft demand is more diversified now than it has been in previous cycles -- the U.S. is markedly less important to the big picture than it was 40 or 50 years ago. So long as global economic growth doesn't come unglued, the supercycle should remain intact. Even the U.S. carriers, though, are facing aging fleets that will soon need to be modernized.

Boeing is one obvious beneficiary of the prolonged aerospace up cycle. Boeing carries a lot of risks right now, though, which I don't have the space to address here. But even after Boeing's recent collapse, the next few months could be hairy (though in the long term, I do believe the 787 will be an industry game-changer).

The aerospace suppliers are perhaps a better alternative. Spirit AeroSystems (SPR - commentary - Cramer's Take) and BE Aerospace (BEAV - commentary - Cramer's Take) are highly leveraged to aerospace. For a broader-based approach, both of these names -- as well as some other commercial aircraft suppliers -- are members of the iShares Dow Jones U.S. Aerospace & Defense (ITA - commentary - Cramer's Take) ETF.

Whichever way you go, the aerospace supercycle can't be ignored, and, while there may be some turbulence along the way, the companies involved in supplying airplanes seem ready to fly.

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At time of publication, Norton was long Boeing and Spirit AeroSystems, though positions may change at any time.

Charles L. Norton, CFA is a principal of GNI Capital, an equity long/short money management firm that provides investment management services to institutional clients including mutual fund sponsors, trust companies, investment advisory firms, corporate retirement plans and family offices. Mr. Norton is responsible for portfolio management and investment research for all of the company's managed assets, including the Vice Fund (VICEX) and the Generation Wave Growth Fund (GWGFX). Previously, Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate long/short equity accounts. Prior to his experience on the buy side, he was an investment banking analyst at Smith Barney. He has a bachelor of science in management degree in finance from Tulane University's A.B. Freeman School of Business, and is a CFA charterholder. He is a member of the CFA Institute and the CFA Society of Dallas-Fort Worth. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.