Commerical Aerospace Ideas and Why It is an Interesting Mid- and Long-Term Investing Opportunity

The commercial aerospace market is familiar to most with personal travel experiences, but less well known is the fact that this industry has produced some of the greatest investment opportunities over the past twenty years. For example, companies like HEICO Corporation (5,448% 20-year return) and TransDigm Group Incorporated (5,513% since March 2006 IPO) demonstrate the potential for value creation in this sector.

Through 4/30/2025. HEICO Corporation and TransDigm Group Incorporated have larger market share today than they did 20 years ago, which may make future returns less robust than past returns.

The commercial aerospace sector continues to offer compelling investment opportunities due to a post-COVID constrained supply of new aircraft and a robust long-term demand outlook. Original equipment manufacturer (“OEM”) production is poised to accelerate, and fixed cost leverage on higher volumes should drive a multi-year backdrop of growth and margin expansion potential for the supply base.

One of the attractive investment qualities of the market is consistent growth, underpinned by increasing per-capita income globally. Over the last 20 years, air travel demand has consistently grown well above global GDP and is projected to continue to increase. The International Air Transport Association (IATA) forecasts a 3.8% compound annual growth rate in passenger volumes from 2023-2043, which is likely to exceed global GDP growth rates that have averaged around 3% over the last decade.

These growth forecasts are supported by record order bookings at Boeing and Airbus. For the four most popular plane models (representing >90% of the industry), the backlog stands at nearly 13,000 planes—13 times greater than what Boeing and Airbus delivered in 2024. Assuming no new orders and at targeted annual build rates for these models, which Boeing and Airbus are not planning to reach for at least 2 years, it would take 7-8 years of production for Boeing and Airbus to clear their backlog. This means industry suppliers may have 10+ years of visibility into the demand for new planes.

1/1/2020 to 4/30/2025

While production rates have been hindered, air travel demand has strongly rebounded from the COVID-lows.

This has caused the average age of the existing fleet to reach record highs, creating what we see as favorable dynamics for suppliers of aftermarket parts and services, and increasing the urgency at Boeing and Airbus to raise production rates for new planes.

Modern commercial airplanes have hundreds of thousands of individual parts. Some of these parts are more commoditized, such as bolts, nuts, rivets, and screws. Others are difficult to manufacture but have limited IP, like the wing or fuselage structures. Finally, some of the more complex components are highly proprietary, often sole-sourced parts, including electronics, sensors, valves, fuel assemblies, and aircraft controls. Suppliers to Boeing and Airbus that make these parts can generally be divided into two groups:

Specific to commercial aerospace, we have often found the following situations can make attractive investment opportunities:

1) Hidden Gems:  In the small cap domain, we often find companies that have highly valuable IP that is being masked by some other issue. Some examples would include an underperforming division, ineffective management, or a substandard capital structure. The value of the “hidden gem” can often be unlocked by new management, a simplification of the business, or even an acquisition of the whole company by a strategic or financial buyer.

2) Serial Acquirers: Companies with high and rising ROICs that have the balance sheet capability and management skills to also grow via acquisition at prices that are attractive for shareholders. The aerospace industry has seen significant M&A activity in the last two years.

1/1/2005 - 4/30/2025. AIR & VSEC

3) Differentiated assets with secular share gain opportunities: One example is in composite materials, namely carbon fibers, which are lighter in weight and stronger than traditional metals such as aluminum. These materials are more heavily used on long-haul twin-aisle planes like the Boeing 787 and Airbus A350, and we see these materials as a strong share gainer in the medium to long term, particularly on next generation single-aisle aircraft. Suppliers of composite materials and structures should also see strong cyclical growth in the near term as build rates at Boeing and Airbus climb to target rates.

In the public markets alone, select transactions among evolving public aerospace companies since the start of 2023 totaled over $24 billion.

Acquiring Company	Ticker	Acquired Company	Announce Date	Transaction Value ($M)
VSE Corp.	VSEC	Desser Tire & Rubber Co.	3/4/2024	$124
TransDigm Group Inc.	TDG	Calspan Corp.	3/14/2024	$725
AAR Corp.	AIR	TRAX USA Corp.	3/20/2023	$140
Ducommun Inc.	DCO	BLR Aerospace LLC	3/21/2023	$115
HEICO Corp.	HEI	Wencor Group LLC	5/15/2023	$2,050
KKR	N/A	Circor Int. Inc.	6/5/2023	$1,600
Barnes Group Inc.	B	MB Aerospace Holdings Ltd	6/5/2023	$740
AAR Corp.	AIR	Triumph Group Product Support	12/21/2023	$725
Crane Co.	CR	Vian Enterprises Inc.	1/3/2024	$103
Arcline investment Mgmt. LP	N/A	Kaman Corp.	1/21/19/2024	$1,800
VSE Corp.	VSEC	Turbine Controls, Inc.	2/29/2024	$120
TransDigm Group Inc.	TDG	Raptor Scientific LLC	5/28/2024	$655
Boeing	BA	Spirit AeroSystems Holdings Inc.	7/1/2024	$8,300
Loar Holdings Inc.	LOAR	Applied Avionics LLC	7/19/2024	$385
Apollo Global Mgmt. Inc.	APO	Barnes Group Inc.	10/7/2024	$3,600
VSE Corp.	VSEC	Kellstrom Aerospace Group, Inc.	10/15/2024	$200
Warbug Pincus & Berkshire Partners	N/A	Triumph Group, Inc.	2/3/2025	$3,000
Total Transaction Value, Select M&A				$24,382

We believe commercial aerospace remains a highly attractive market for investment today due to the potential for high and increasing returns on invested capital and supportive industry dynamics over the next 5-10 years. Currently, we see notable opportunity in stocks that are more levered to rising OEM production levels. Companies with greater aftermarket exposure have experienced high growth rates as air travel demand recovered post COVID while new plane production was constrained, leading to more maintenance on the existing fleet. Those growth rates appear to be normalizing.

Conversely, suppliers that sell primarily to OEMs have seen lower growth rates as Boeing and Airbus have struggled to expand production. Rising build rates at OEMs and the accompanying fixed cost leverage should create strong earnings growth for these suppliers over the next several years. Additionally, we believe the enormous backlog of planes will likely extend the typical OEM build cycle once peak production rates are achieved. Finally, we believe there is a secular share gain opportunity in areas such as composite materials that could come into play in the years ahead as plans for next-generation single-aisle plane designs progress.