An Unacknowledged Theme Heading into 2025
By Clear Perspective Advisors on December 19, 2024
The Much-Forgotten Duopoly
Boeing (BA) has been unable to avoid the limelight for much of the past decade. The company’s woes began in early 2019 with two fatal crashes of the newly produced 737 MAX. The U.S. Federal Aviation Administration and regulators across the world grounded all 737 MAX jets in March 2019. David Calhoun took over as CEO in January 2020, and commercial flights of the 737 MAX resumed in December of that year. All was well for BA until the start of 2024 when an emergency exit blew off the side of a 737 MAX 9 during an Alaska Airlines flight. This began investigations into BA’s processes and controls, and David Calhoun announced his plans to step down in March 2024.
Enters Kelly Ortberg, announced as CEO on August 8. He has chosen to be based in Seattle, where BA’s main commercial aircraft assembly plants are located. He has a vast history of industrial and aerospace experience over his 35-year career, with previous roles at Texas Instruments and Rockwell Collins. In 2013, Ortberg became CEO of Rockwell Collins; during his five-year tenure as CEO, Rockwell’s stock rose 107%.
As it sits today, BA is down ~35% year-to-date – its worst yearly performance since 2008. Entering the year, there was not a single sell rating on its shares, and many of the company’s faults appeared to be in the past. But following the Alaska Air incident, investigations, management overhaul, and union labor strike, the stock is one of the worst performers in the S&P this year. When many investors find the company to be out of favor, we are quite bullish and think the company can see a turnaround heading into 2025.
Chart 1: BA Has Been One of the Worst Performers in the S&P 500 YTD[1]
The Outlook for BA
BA’s worker strike came to an end on November 5th after seven weeks of negotiations. Quickly following workers returning to the plants, the company announced its plans to resume building the 737 MAX. This sent BA’s stock price up by over 4% for its best day in over four months.
BA raised $21 billion in an equity offering which provided it with ample cash for the interim. As of November 30th, its backlog consists of over 6,000 unfilled orders equivalent to approximately $500 billion in revenue. With new hires across management at the firm, it would not be beyond the ordinary for them to deploy their own strategies, such as spinning out different aspects of the company to raise cash and remaining focused on 737 and 737 MAX production.
Its previous quarter was not pretty, but all eyes are on getting back to full production. Commercial plane deliveries were up 10% y/y, and they delivered 116 planes in the quarter. BA has received many sell-side upgrades over the last couple of weeks as the company looks to recover from events earlier this year. We believe the improved management team, balance sheet enhancement, strong market share operating in a duopoly, and importance to the sovereignty of the U.S. are reasons why BA will see a turnaround in the coming year.
Companies with Exposure to Aerospace
Outside of BA’s fundamentals, the company operates in a growing industry and is one of the most important entities for the future of the global economy. Aerospace and aviation are industries that we believe will see strong demand over the coming years. Two companies on our radar in this space are Eaton (ETN) and GE Aerospace (GE).
ETN’s aerospace segment consists of 14% of the company’s total revenue. The segment grew 13% in 2023 and is estimated to grow 10% in 2024. Product offerings in their aerospace division consist of fuel and hydraulic systems, electric power, motion control software, oxygen systems, and more. Its commercial aerospace business has seen some headwinds due to BA’s lack of production in the previous quarter, but the segment is expected to grow double-digits in 2025. In Q3, ETN had record-high sales in aerospace with sales rising 9% y/y. Its backlog in aerospace rose 14% y/y to $3.7 billion and its operating profit rose 10% y/y.
Chart 2: ETN’s Aerospace Backlog Rose 12% in Q3 as Demand Remains Robust[2]
GE is the second company with exposure to aerospace. Its aerospace commercial engines and services account for 76% of total revenues, consisting of engine production and aftermarket services (maintenance, repair, etc.). Most planes last 20-30 years and utilize anywhere between four to six different engines in their lifetime; GE is servicing and remodeling these planes during this period.
In the third quarter, orders grew 28% y/y, and the company noted an expansion in aftermarket growth. Service sales rose 10% y/y and equipment sales 5% y/y. Supply chain bottlenecks remain an area of focus, and CEO Larry Culp is focused on solving these issues. GE has hired over 550 engineers and is spending $1 billion across its supply chain to remain attentive to the problems.
At any given time, 900,000 people are flying on a GE Aerospace-powered aircraft. Three out of four commercial flights are powered by GE engines. In a future powered by exploration and travel, GE is a beneficiary of continued demand.
Recent developments from Honeywell (HON) show the extent to which demand is increasing for aerospace-focused companies. Earlier this week, HON confirmed rumors that it is contemplating a separation of its aerospace division following an activist push for the breakup. Activist Elliot Investment Management is the firm behind the push for HON to spin off the business, stating that it is the “right course” for HON.[3] The reasoning behind the spin-off is for HON to realize its true value – we wrote about our opinion on why spins work earlier this year. The move would follow other recent successful spin-offs from GE and 3M (MMM); GE Vernova (GEV) has gained ~140% since it began trading separately from GE earlier this year. To note, HON’s aerospace division is its largest division by sales with the highest margins.
Among many other favorite themes in 2025, such as housing, cybersecurity, and India, aerospace is on that list. Aerospace remains an important part of the economy, and many private companies (SpaceX, Boom Supersonic) are heavily investing in the industry. We believe the industry is well-positioned to gain from greater demand and investment over the coming years.
[1] Source: FactSet. As of December 16, 2024.
[2] Source: Eaton. AS of October 31, 2024.
[3] Source: Investors.com. AS of December 16, 2024.
