More Aerospace Stocks With Upside: Hexcel Corporation (HXL), Triumph Group Inc (TGI)

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The changing air transportation landscape is making this an exciting time to consider jumping aboard companies that build aircraft or components. Specifically, replacements and upgrades of equipment are under way at several domestic airlines, including those having recently merged or are planning to merge. For instance, American and US Airways have inked a merger agreement, and the likes of Southwest/Airtran, UAL/Continental, and Delta/Northwest have combined during the past five years. Furthermore, the addition of short-haul routes is creating demand for smaller, more-efficient aircraft. Here are a few of the firms that are positioned to benefit from such trends:

Hexcel Corporation (NYSE:HXL)Embraer-Empresa Brasileir de Aero (ADR)

Brazilian manufacturer Embraer derives more than 60% of revenue from the commercial aviation market. Its core E-190 regional jet remains a popular choice among carriers. For one, JetBlue Airways, a long-time customer, has 31 E-190s on order over the next five years. Venezuela state-run airline Conviasa recently agreed to purchase 20 of those units. Moreover, Delta has options to purchase a significant number of E-175s beginning in 2014. Thus, a favorable air travel climate would support demand.

Sales and gross margins have been ascending in tandem with each other, factors that likely allowed share earnings to soar tremendously in 2012. Interestingly, too, Embraer’s defense business, comprising about 15% of total revenues, is growing rapidly while also receiving orders from within Brazil, as well as Indonesia, Mauritania, and India.

ERJ American Depository Receipts (ADRs) have appeal for the reasons stated above. The company is better situated than the broader industry in terms of numerous Profitability Ratios and Financial Strength metrics (see
Ratios). A sustained upturn in its third business, executive jets, would provide a further boost to the company’s potential as a long-term holding.

Triumph Group Inc (NYSE:TGI)

Triumph Group Inc (NYSE:TGI) relies on Boeing, the aircraft giant, for about 50% of total revenues. It is a producer of Aerostructures and Aerospace Systems, with plants across the United States. Sales growth of just above 10% this fiscal year (ends March 31) is stemming from rising production rates at existing programs. The order backlog has remained on the upswing, up 5% year over year at Dec. 31.

Profit margins are climbing behind lower selling, general, and administrative costs, as well as reduced interest expense. What caught my eye was that Triumph Group Inc (NYSE:TGI)’s commercial-related sales jumped 22% in the latest quarter. The growth was partially offset by a 9% decline in military sales. But, it helps to confirm my belief that the aircraft production market is robust at this juncture. After likely closing out fiscal 2013 with a 20% or so share-net advance, the company should be in store for ongoing improvements in the year ending March, 2014.

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