Aerospace Propels GE, Honeywell, Bodes Well for Boeing, Lockheed

The aviation and aerospace units at General Electric Co. (GE) and Honeywell International Inc. (HON) helped the two industrial giants beat earnings estimates, which bodes well for Lockheed Martin Corp. (LMT) and Boeing Co. (BA) as they prepare to report quarterly financial results next week.

"Aviation is so powerful that it's lifting all boats," TheStreet founder Jim Cramer said on CNBC Friday while discussing GE's top- and bottom-line beats for the fiscal first quarter. Cramer used to own GE for his Action Alerts PLUS charitable trust before selling the position at the end of February.

Orders for GE's aviation unit rose 13% year over year to $8.1 billion. Segment profit surged 26% to $1.6 billion mainly driven by higher prices on commercial engines and aftermarket materials. 

GE's aviation unit sells jet engines, landing gear and digital solutions, such as flight phase analysis and fuel management.

"Aviation had a strong start to the year, outperforming in the quarter relative to expectations," GE Chief Financial Officer Jamie Miller said during the conference call with analysts Friday. "This was driven principally by better spares performance, cost execution and favorable engine mix. We expect these trends to continue."

GE shares jumped 5% to $14.69 at 1:50 p.m. New York time.

Similarly, Honeywell's aerospace division had a blow-out quarter. Aerospace revenue increased 12% year over year to $3.98 billion, topping estimates. On an organic basis, aerospace sales for the quarter rose 8% driven by growth in commercial original equipment and in the U.S. defense market. Honeywell's aerospace unit sells engines, navigation, lighting as well as cockpit systems and displays among other products.

"The organic growth acceleration in the Aerospace business was terrific and was a quite encouraging sign of things to come," Cramer and the AAP team said in an April 20 note to subscribers. "Altogether, we view the aerospace market as one of the best secular growth trends out there."

Due to the strong demand within its U.S. defense business and improved commercial original equipment outlook, the Morris Plains, N.J.-based industrial giant now expects organic sales for the full year to rise by between 3% and 5%, compared to its prior guidance of 1% to 3%.

Honeywell Chief Executive Officer Darius Adamczyk said he's "extraordinarily optimistic" on the Aerospace prospects, suggesting that there could be more upside potential in the second half of the year, but hedged his optimism by noting that it's only the first quarter.

Shares of Honeywell rose 0.7% to $149.16 in afternoon trading Friday.

GE management also expressed confidence in the strength of the aerospace market, however, Cowen equity analyst Gautam Khanna was still doubtful.

"Given the strong start in the first quarter at other segments (i.e., mainly Aviation) the reiterated guidance may be viewed as credible, even though Aero mix should weaken throughout the year as LEAP [engine] deliveries ramp and Power backlog converts to sales," Khanna said in an April 20 research note.

That being said, the overall sentiment surrounding the aerospace market suggests that the pure aerospace and defense companies, Lockheed Martin and Boeing, could also see better-than-expected quarterly results.

Lockheed is scheduled to report first-quarter financial results on April 24, while Boeing will report on April 25.

Lockheed is expected to post adjusted earnings of $3.39 a share on revenue of $11.24 billion, according to analysts surveyed by FactSet. Analysts, meanwhile, anticipate that Boeing will report adjusted earnings of $2.57 a share on revenue of $22.2 billion.

Still, investors should be aware of some risks.

Bloomberg Intelligence analyst Douglas Rothacker said the headlines on the F-25 delivery rift with the Pentagon represent an overhang for Lockheed, "though the F-25 revenue isn't wholly aligned with deliveries, given the program remains in an early production phase, indicating risks could largely be mitigated in [the first quarter]."

Separately, the Government Accountability Office issued a report earlier this week on the Boeing KC-46, a military aerial refueling aircraft, suggesting that the first delivery of 18 aircraft could slip to May 2019.

But the potential delay past the initial 2018 delivery target should not surprise investors as this has been widely speculated, said Canaccord Genuity analyst Ken Herbert.

"So, while we expect the program to be a greater cash investment than initially expected, and we do see the strong potential of delivery delays into 2019, we do not believe this will materially impact the narrative on Boeing stock," Herbert said. "Sentiment on the stock today focuses on the strong commercial fundamentals (trade risk aside), FCF growth, and a very shareholder-friendly capital allocation strategy, which we continue to believe is largely reflected in the stock."

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