- Deutsche Bank is getting bullish on a aerospace recovery, triggered by the vaccine rollout.
- The sector’s valuations are still attractive, offering cheap options to play the reopening trade.
- These are the firm’s top 7 aerospace and defence stocks set to soar on the vaccine recovery.
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Inoculation programs are kickstarting around the globe, and Deutsche Bank is getting bullish on the upside this presents for the aerospace and defence sector, particularly as air travel gradually resumes.
The sector is one of the worst performers globally over the last year. The MSCI aerospace and defense index is down over 25% year-on-year, despite a number of other “reopening-trade stocks” staging steep recoveries since the crash last March. Indeed, the MSCI global value index is now only 0.1% below where it was 12 months ago.
“The time is now” to get constructive on the sector, Deutsche Bank wrote in a note on February 10. “The vaccine remains the best hope to walk away from this crisis and let passenger travel return again,” the firm added.
Deutsche said the main beneficiary of the vaccine rollout should be the so-called ‘narrow-body’ aircraft – typically single-aisle jets that can seat up to six on either side and are used for short-haul domestic flights – as only requirement the approval of the national government is required.
Moreover, leisure passengers will be the first to come back first on domestic routes, rather than business travellers. Anyone travelling for pleasure would tend to make their own decisions and pent-up demand among these passengers is huge, Deutsche said.
For widebody aircraft, usually used on longer journeys, such as Boeing’s 767 or the Airbus A380, the situation is slightly trickier. Long-haul flights are dependent on travel restrictions across international borders, and the “bilateral processes can be lengthy,” the note said. The imposition of so-called “air corridors” between nations has been controversial throughout the crisis, with many agreements falling through, as the spread of the virus evolved, such as the emergence of new mutations.
Passenger demand for these flights is likely to be further delayed, while business travel is unlikely to stage a recovery in the near future, especially given that corporations are applying some “duty of care,” the note said. As a result of the wider unknown structural implications for the sector, Deutsche Bank doubts there will be any meaningful recovery in wide-body usage even in 2022.
Geopolitical tensions between China and Russia and the US, as well as Europe, may also present a tailwind for the sector, Deutsche said. President Joe Biden is not expected to change the US stance much and, therefore, defence budgets should not see any cuts for the next two to three years, Deutsche Bank believes.
UK defense firm BAE Systems and French rival Thales are well-placed to benefit, as they are most able to execute their order books and benefit from operational leverage, meaning improved profitability and cash conversion, the note said.
However, there will be “a day of reckoning, when governments pressed to invest more in areas deeply impacted by the Covid-19 crisis,” the note said, adding that this could be when governments believe they have spent enough on modernization and the supply chain no longer needs life support, which the bank said could possibly happen by 2023-2025, when commercial aerospace recovers.
Deutsche Bank also pointed to European aerospace firm Airbus and German engine manufacturer MTU Aero Engines as forces that are leading the charge in sustainable air travel. “Airbus took decisive steps in setting the agenda and launching three hydrogen-powered concepts. MTU Aero Engines appears to be at the forefront of research, too,” the note said.
Lastly, valuations still look very attractive in the space. The sector still trades at a 2x discount to capital goods and offer a “key entry point early in the next cycle,” the note said. These are the seven stocks in Deutsche Bank’s coverage that they are recommending to capitalize on the recovery in air travel and defense spending: