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What Roger Moore, alias James Bond, revealed in the 1979 movie, Moonraker, was that it can be a long way from a concept - fiendish scientist adapts a rocket to destroy London - to reality. But we digress. The reality of the Moonraker story is that the U.S. did land the first person on the moon on July 20, 1969. The aerospace industry has never been the same since.
In financial terms, Bond author Ian Fleming had it about right: Bond, an inveterate gambler, staked his bets on being able to stop the dastardly Hugo Drax, a mining and materials magnate, with cunning and some special weapons from Q, the gadget wonk. And that, in essence, is what the aerospace industry is about - huge gambles made on rockets that may fail - sometimes tragically. Airplane companies bet the farm that they can outdo one another, with one sub-sector (defence) immune to the drudgery of selling tickets, while another (airlines) is slave to filling cabins and ferrying people to destinations at the lowest possible cost. The industry’s research and development is a network of laboratories and universities funded in the name of science.
In spite of the complexity of the aerospace sector, one can invest in great companies like plane maker Boeing Co. (BA-NYSE) and fighter jet maker Northrop Grumman Corp. (NOC-NYSE) and several Canadian companies including satellite component and service company Com Dev International Ltd. (CDV-TSX). On the periphery of the core of the space business, Bombardier Inc. (BBD.B-TSX) competes in the small airliner/business jet market. Airlines are part of the aerospace sector. In a new trend, American carriers are getting themselves out of Chapter 11 insolvency and into one another’s arms as consolidations tempt investors to ignore the fundamental fact that anyone who owns a plane is hostage to the price of jet fuel. And if picking stocks in this minefield of varying business models and yo-yoing earnings is daunting, there are several funds, notably the PowerShares Aerospace & Defense Exchange Traded Fund (PPA - AMEX), that track the industry.
For now, the aerospace industry is booming. PPA units have risen 20 per cent since making what chart followers call a triple bottom in mid-summer. A sampling of the sector, its heaviest weighting is in Boeing Co., followed by plane maker Lockheed Martin Corp., defense company United Technologies Corp., systems specialist Honeywell International Inc., satellite transmission company DirecTV Group Ltd., defense contractors General Dynamic Corp. and Raytheon Co. and a host of other satellite and communications companies.
Can one make money in the sector? For sure. The DXS Space Defense Index, which PPA replicates, is up 16.26 per cent per year compounded annually in the five years ended Sept. 30, 2006 compared to the relatively modest, 6.97 per cent average annual compound gain of the S&P 500 Composite Index in the same period. Both are expressed in U.S. dollars.
There is no return without risk and aerospace shows it. Take the current joust between Boeing Co. and EADS, parent of the troubled Airbus unit. Boeing’s shares have risen nearly a quarter in value since September on the back of the woes of EADS. The European plane maker is trying to sell its two decker jumbo competitor to airlines that have previously been committed to the Boeing 747. Twenty-five of EADS’ behemoth, the A380, were supposed to be delivered to airlines in 2007. But wiring issues have delayed this beast of the skies and damaged the credibility of the maker. The latest news is that just one A380 will be delivered in 2007, cutting the equivalent of $6 billion (U.S.) off EADS’ earnings between 2006 and 2010. The costs could soar even higher, for such big customers as Qantas, Lufthansa and Virgin Atlantic are said to want EADS to pay for leasing replacement aircraft to provide the seats they hoped to get in the A380, according British newsweekly The Economist. EADS is gushing red ink with a reported loss equivalent to $250 million in the third quarter of 2006 just as Boeing is picking up orders that are being cancelled for the European super-jumbo plane.
In Canada, life is less complex. Investors who want to buy things that fly can take their chances with Bombardier Inc., recently priced at $3.94, down from $26 five years ago. Bombardier, a Monreal-based maker of railway cars and smallish jet transports, remains hooked on government subsidies and has so rocked investors with poor margins and failed expectations that the consensus of analysts is a “hold,” that is, keep it if you’ve got it, but don’t rush out to buy.
Investors are showing more enthusiasm for satellite subsystems maker, Com Dev International Ltd., a smallish, Cambridge, Ontario company that makes and services satellite components. Shares, recently priced at $6.46, are up from about $2.00 at the beginning of 2006. Analysts have a buy rating on shares, which appear to have risen on expectations that replacement work to replace old satellite systems will put a lot of cash into Com Dev’s kitty next year.
What would Fleming have made of the battles in capital markets where the hopes of science meet the fears of investors? We can only assume that he would have been in his element. As the swooping and swooning returns of the aerospace industry show, betting on things that fly is still a casino of risks.
Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.