3 Aerospace Picks That Are Not Boeing

When we discuss aerospace and defense, Boeing is one of the names that quickly come to mind. On any normal day, Boeing can call itself the largest exporter in the United States. However, Boeing is definitely not going through normal times. In this report, I discuss three investment opportunities for the aerospace industry that are not Boeing, and I will briefly discuss each and explain why Boeing is laden with risk.

Boeing: High Risk Throughout The Organization

I maintain my buy rating for Boeing, but the reality is that its risk profile does not make the company extremely attractive for investment, and its near-term financials are not attractive either. We are seeing lower production rates on the Boeing 737 MAX and Boeing 787 program. The single aisle production has been capped due to shortfalls in oversight and manufacturing quality for the Boeing 737 MAX, while shortages are limiting the Dreamliner output.

Beyond that, the defense segment is struggling with contracts for which it was not sufficiently protected for cost inflation and Boeing is facing a leadership change next year in an effort to promote safety, quality and integrity through the organization. I strongly believe that things will get better for Boeing, but there are definitely lower risk names that are more appealing at this point in time.

Selecting 3 Aerospace Stocks That Are Better Than Boeing

The aerospace & defense industry is big. So, selecting three aerospace picks that are better than Boeing does not mean that if your favorite aerospace pick is not included that I do not see value in it. My stock screener covers over 100 names, mostly in the aerospace & defense and airline industries, so narrowing it down to three means we are cutting away quite some investment opportunities.

Focusing on aerospace & defense, we cover 54 names of which 40 have a buy rating according to forward projections and balance sheet data. From there, I have imposed additional criteria to the stock screener output:

• The stock should currently trade at a discount to both the industry group as well as the median EV/EBITDA multiple for the company.
• The stock should have a history of outperforming the market, either since inception or over the past three years.
• The upside we see should exceed the annualized return of the S&P 500 which is 10.3%.

The reason why we apply these specific criteria is rather easy. If the stock trades at a discount to its own valuation as well as its median EV/EBITDA, we do know that whatever multiple we use, there is upside and the possibility of EV/EBITDA multiple expansion which provides upside opportunity as well as padding. Furthermore, we use a relation to the market performance for the simple reason that in the industry there might be names that are undervalued but the value for whatever reason never translates to the stock performance. If EBITDA growth does not translate favorably to stock performance over time, we are not putting it in our top list because we like to see the names which have a history of value-driven outperformance. Applying these criteria for 2025 earnings, we end up with 6 names, of which I will discuss three.

Embraer: My #3 Aerospace Spick

My second aerospace pick is Embraer (ERJ). Embraer has exposure to the defense industry, as well as business jets and commercial passenger jets. So, it provides a nice mix of strength in end markets. In September 2022, I marked Embraer stock a buy and since then, the stock has gained 180% compared to a 37.4% return for the S&P 500 and since publication of my most recent report covering Embraer, the stock has gained another 63% compared to less than 10% for the S&P 500. Earlier this year, Embraer stock fell as the company missed its delivery guidance. The results so far are quite promising. The first quarter tends to be the weakest quarter for Embraer and even in that quarter revenues were up 25% while deliveries increased 67%. For 2025, I expect that EBITDA will grow to by roughly 13.5% to somewhere north of $750 million and that would mark more than 40% growth since 2023. In a more upbeat scenario, the growth could even be closer to 50% which would indicate additional upside of around 15%. Embraer currently does not pay any dividend.

Saab: My #2 Aerospace Spick

The number two in our list is Saab (OTCPK:SAABF), a Swedish defense company, and that is a surprising name for some investors. With high demand for defense equipment, you would expect that we would see names such as Lockheed Martin, Northrop Grumman, Boeing, General Dynamics and RTX Corporation on the list. The opposite is true. Those that follow my work know that I pointed out that while defense equipment demand is high, it is the lesser known European names that might be benefiting. Saab stock is a great example of that. In May 2023, I marked Saab stock a buy and the return has been phenomenal with an 80% return compared to a 33% return for the S&P 500. Even after the significant increase in share prices, I still see 17.4% upside for Saab against its median EV/EBITDA multiple. The dividend yield of 0.6% is hardly something to be signing up for, but with the significant increase in share price, it is also not to be expected that dividend growth will pace at the same rate. EBITDA for 2025 is expected to grow 19%, which marks an increase of nearly 50% from 2023 and as a result, I believe that the upside is firmly supported by the outlook.

Bombardier: My #1 Aerospace Spick

The number one aerospace pick on my list is once again not a US company, it is Canadian Bombardier (OTCQX:BDRBF). Years ago, this company was on the verge of bankruptcy as the company had bet on success in the commercial airplane market in the form of the C Series, but continued cost growth forced the company to sell major parts of its business to service the debt. These days, Bombardier has successfully pivoted to business jets, and they really know what they are doing. In June 2022, I marked the stock a buy and since then, Bombardier stock surged more than 350% and even since my report earlier this year, Bombardier stock returned nearly 50%. EBITDA for 2025 is expected to show around 17% year-over-year growth and 27.5% since 2023, providing solid support for an additional 22% upside.

Bombardier is probably the best turnaround story I have seen in aerospace. The company is not paying a dividend and I don’t expect them to pay a common dividend, but it should be kept in mind that years ago this was a company of which many, including myself, had doubted that it would ever generate a free cash flow that would allow it to reduce debt.

Conclusion: A Surprising List of Top Aerospace Stocks

After applying our criteria to select our top aerospace stocks, we are left with three names, namely Embraer, Saab and Bombardier. I believe that is a surprising list as all of these three names have various things in common. They are not US companies and they actually cannot count themselves amongst the top defense companies. It quite clearly shows that for upside, we do not necessarily have to look at the US aerospace & defense industry. It seems that names with a significant exposure to business jets are doing quite well and the same holds for names for defense names outside of the US. What these names also have in common is that they trade at discounts to their peers, and that means that there could be additional upside driven by EV/EBITDA expansion towards industry standard.

Other names that did not make it to the list but do emphasize this are BAE Systems and Rheinmetall. Since we looked at aerospace stocks that are not Boeing, it might also be somewhat surprising that Airbus is not in that list. Are we bearish on Airbus? No. What worked somewhat against Airbus is that compared to the market performance since inception, it has not had all characteristics, we are looking for but it is definitely a name that we see upside in, so you can consider Airbus our bonus aerospace pick.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.