Boeing (BA) and Embraer SA (ERJ) continue their growth trajectory despite fears of a fiscal cliff and cuts in defense spending, as Boeing remains to a large extent levered to its commercial aerospace business, and Embraer‘s defense business is levered almost exclusively internationally, says Ray Neidl, Senior Equity Analyst at Calyon Securities (USA) Inc.
“Embraer, on the other hand, their defense business is almost exclusively for Third World countries, so it should have minimal effect on what they are doing there. In the case of Boeing, of course, any disruption would be difficult for their defense business, but the thing is the main driver in my opinion of the Boeing stock price does remain in the commercial sector, which is very, very strong at this point as airlines try to modernize their fleet for efficiency and to cut cost,” Neidl said.
Neidl says half of Boeing‘s commercial aircraft orders is for growth and the other half is for replacement, and that it is a good ratio to have, as airlines are engaging in cost reductions worldwide, and their order book is so thick that cancellations can be replaced. He adds that “the new products that Boeing has are, one, going to be much more fuel efficient with digital technology, and number two, are going to be more efficient in operating and maintenance. And for that reason, even in a weak economic environment, many airlines would want to purchase that product.”
Neidl has a “buy” rating on Embraer despite the current slow spending by regional airlines in North America. He expects regional North American regional airlines and international startup airlines to increase their spending in the coming couple of years. He adds that, although the business jet business is flat, their defense products are in the developing world and increasing as a proportion of the total defense business.
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