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Stock Strategist Industry Reports

Don’t Panic Over Weaker Jet Orders

Even with faltering demand for large wide-body jets, we still see investment opportunity in firms exposed to the strength of the narrow-body market.

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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 (BA) and  Airbus (AIR), but narrow bodies look more secure. Regional jet growth looks underwhelming, but  Embraer (ERJ) still enjoys a commanding position. We point to Airbus,  Safran (SAF), and  United Technologies (UTX) 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 Airbus A320 and Boeing 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.

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