On Thursday, RBC Capital Markets adjusted its stance on several stocks within the Aerospace & Defense (A&D) sector. The firm upgraded Hexcel Corporation (NYSE:HXL) and Raytheon (NYSE:RTN) Technologies Corp (NYSE:NYSE:RTX) to 'Outperform' from 'Sector Perform,' citing a favorable mix of aerospace revenue and positive market dynamics. Conversely, General Dynamics Corp (NYSE:NYSE:GD) and Vectrus Inc (NYSE:NYSE:VVX) were downgraded to 'Sector Perform' from 'Outperform' due to concerns about delivery timings and flat margin outlooks.
The upgrades for HXL and RTX reflect RBC Capital's confidence in their market positioning and financial prospects. HXL, with its SMID aerospace original equipment (OE) exposure and reset expectations for 2025-2026, coupled with an attractive valuation, was seen as well-positioned to outperform. RTX was favored for its robust defense portfolio and a favorable mix of aerospace OE and aftermarket (AM) services, along with the continued de-risking of its Geared Turbofan (GTF) engines.
On the other hand, the downgrades of GD and VVX were based on several factors. GD's downgrade was influenced by the timing of Gulfstream jet deliveries and perceived risks within its defense portfolio. VVX faced a downgrade due to its service and international defense exposure, as well as a forecast for flat margins.
The firm's 'Aerospace & Defense 2025 Outlook' note emphasized the strength of the A&D markets into 2025 but recommended a cautious approach to investor sentiment. The election of Trump and the creation of the DOGE were mentioned as negatives for defense sentiment.
Additionally, the note highlighted the unexpected investor shift from aftermarket stocks like Fortress Transportation (NASDAQ:FTAI) and Infrastructure Investors LLC (NASDAQ:FTAI), Loral Space & Communications Inc. (NASDAQ:LORL), and Sarossa Capital Ltd (LON:SARO) towards aerospace OE stocks.
RBC Capital Markets acknowledged the strong fundamentals of aftermarket stocks and suggested that recent sell-offs may have been excessive. The debate now focuses on whether the potential upside can justify these stocks' status as safe havens.
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The firm's preference leans towards companies with a diversified aerospace revenue mix, such as Howmet Aerospace Inc. (NYSE:HWM (BMV:HWM)), RTX, and Safran SA (OTC:SAFRY) (EPA:SAF), which are expected to benefit from increased production rates and are well-positioned to handle OE execution challenges. The note also mentioned Boeing Co (NYSE:NYSE:BA) and its ability to leverage inventory to raise delivery rates, but cautioned that current expectations leave little room for error.
In other recent news, Fortress Transportation's Aviation division, FTAI Aviation, has made notable strides. In the third quarter of 2024, the company reported significant growth with adjusted EBITDA reaching $232 million, a 50% increase from the same period last year. The leasing segment and aerospace products contributed $136.4 million and $101.8 million to the EBITDA, respectively.
FTAI Aviation also recently sold its last two offshore energy vessels, Pioneer and Pride, for approximately $143 million, aligning with its commitment to concentrate on its aviation aftermarket business. This strategic move was seen as positive by analyst firms BTIG, Deutsche Bank (ETR:DBKGn), and Stifel, all of which maintained a Buy rating on Fortress Transportation.
In partnership with Chromalloy, FTAI received Federal Aviation Administration (FAA) approval for a key engine component. This approval could potentially double FTAI's EBITDA per engine module and reduce engine shop visit costs.
Furthermore, Fortress Transportation's Aerospace Products division experienced substantial growth in the third quarter, onboarding 19 new clients. This client growth, coupled with the initiation of engine sales related to the V2500 engine portfolio earlier in 2024, positions FTAI for continued success.
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