Desjardins Favors Airline, Aerospace Sectors Over Heavy Equipment Stocks
The industrials space is one that will surely suffer in a widespread economic slowdown. But it could also benefit from massive stimulus programs and in certain cases, lower oil prices. It breaks down into four distinct industries: aerospace & defence, railways, heavy equipment and airlines.
Desjardins Securities analyst Benoit Poirier expects the low price of crude will benefit the airline sector, and therefore by extension, the aerospace sector. He thinks they are in a better position to cope with the economic slowdown, which bodes well for their profitability in 2009.
Mr. Poirier sees limited downside for their already-battered share prices “as current levels already reflect a pronounced drop in aircraft deliveries, revenues and profitability in both the commercial and business jet markets.”
Desjardins also expects the current downcycle will be shorter than previous ones. The analyst anticipates that airlines will consider adding to their fleets, which has positive implications for Bombardier Inc. (BDRAF.PK) and CAE Inc. (CGT). “Recall that North American airlines have old fleets that will need to be replaced sooner rather than later,” Mr. Poirier said in a research note.
It comes as no surprise that trouble in both the stock and housing markets in 2008 will probably force consumers to spend less on air travel. However, the analyst told clients that while overall traffic is expected to slow in 2009, global revenue passenger kilometres have not declined more than 3% in 35 years. U.S. airlines also took steps to reduce costs as oil peaked last year, cut capacity and introduced surcharges that in most case, remain in place despite the sharp decline for oil.
Barack Obama’s stimulus plan and similar efforts around the world is welcome news for engineering and construction companies. But it will be less of a benefit to heavy equipment firms as stimulus plans will not be enough to offset weakness in construction and mining, Mr. Poirier said. He highlighted Finning International Inc. (FINGF.PK), which derives just 18% of its total revenue from the oil sands, despite the fact that investors perceive it as an indirect play on oil and gas.
Among the companies Desjardins covers, meanwhile, construction typically accounts for 20% to 44% of total revenue. So with Canadian housing starts forecast to decline 24% in 2009 compared to a decrease of 20% in the U.S., the firm sees a challenging outlook going forward. Desjardins is also bearish on mining as a result of weak commodity prices and the large capacity cuts that have been made.
As a result, Mr. Poirier prefers Toromont Industries Ltd. (TMTNF.PK) over Finning. Meanwhile, Desjardins’ screens rank aerospace & defence first, followed by railways, heavy equipment and airlines. “Although airline fundamentals are solid, the sector is weak on a quantitative basis because of low and falling ROE,” the analyst said. “However, our screens are based on trailing ROEs, which do not yet reflect the significant collapse in oil and jet fuel prices.”