The wonderful thing about the commercial aerospace industry is there are just a few players making highly engineered products, so it is easy to track how bad news for one—a frequent occurrence these days—might affect the others.
Rolls-Royce (ticker: RR.London) reported dreadful first-half numbers Thursday. The result? Shares dropped 1.2%. Bad numbers, again, are no rarity, and Rolls shares were down more than 60% year to date, coming into the earnings disclosure.
Still, the company burned through about $3.7 billion of cash in the first half of 2020 and services revenue plummeted 46% year over year. Parts and service is a big part of any aerospace supplier’s business.
Looking ahead, Rolls laid out scenarios that assume no second Covid-19 wave, and that in 2021, flying hours are only down 30% relative to 2019, compared with down 55% in 2020.
Off 30% in 2021 would be good news because the aerospace recovery has been painfully slow. U.S. commercial air traffic in August is off roughly 71% year over year. The pace of the recovery, of course, has implications for all major engine makers including Raytheon Technologies (RTX) and General Electric ( GE ).
Raytheon, for its part, owns the engine maker Pratt & Whitney as well as Collins aerospace and Goodrich. GE’s commercial aerospace unit is the company’s largest, most valuable division.
Credit Suisse analyst John Walsh trimmed his estimates for GE’s free cash flow on Thursday evening, based in part on Rolls-Royce and the state of the aerospace recovery. He now expects GE’s industrial businesses to burn through $3.2 billion of cash in 2020, compared with a prior estimate of $1.4 billion.
That isn’t great, but Wall Street’s 2020 consensus forecast for cash burn was already at $2.7 billion. Walsh’s call looked a little optimistic before the cut.
“IATA currently does not expect flight hours to reach 2019 levels until 2024,” wrote Walsh in his research report, referring to the International Air Transport Association. “We think parked aircraft will continue to pressure engine manufacturers more than other aerospace suppliers due to parts cannibalization.”
The outlook for GE’s engine-service business, however, is a little better than the prospects for Rolls. “Utilization levels for GE Aviation are down 43% since January, a 10% narrower decline than key engine peers,” wrote Barclays analyst Julian Mitchell in a Tuesday research report. “The rebound at GE is being led by the narrow-body CFM56 engine.”
The CFM56 powers many 737 and A320 models. Those two narrow-body planes are the workhorses of the aerospace industry. (Narrow-body refers to single aisles, running down the middle of the aircraft. Wide-body aircraft are twin-aisle models like Boeing’s 777s.)
Mitchell rates GE shares the equivalent of Buy and has a $9 price target for the stock. Walsh, for his part, is neutral on GE shares, rating them the equivalent of Hold. His price target is $7 a share.
Walsh is a little more bearish than the average analyst. Almost 60% of analysts covering GE stock rate shares Buy. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 55%. What’s more, the average analyst price target is about $7.75 a share, up almost 20% from recent levels.
(Walsh and Mitchell don’t cover Raytheon, it is covered by their firms’ aerospace & defense analysts.)
GE stock is down about 42% year to date, worse than comparable changes in the Dow and S&P 500. Shares of airframe makers— Airbus (AIR.France) and Boeing (BA)—are down 47% and 45%, respectively. Shares of other aerospace engine makers— Safran (SAF.France) and Raytheon—are off 26% and 31% year to date, respectively.
