Canaccord: Brexit Vote Not A Major Headwind For Aerospace, Defense Sector

Canaccord analysts said the surprise vote by the U.K. to leave the European Union in the long term should have minimal impact on the global aerospace and defense sector.

The brokerage noted that stocks with more defense and commercial AM exposure will benefit, while the sentiment on the commercial OE and business jet cycles would be hurt due to the uncertainty.

"Near term, there is risk around just how the UK will start to unwind it relationship with the European Union, and what will the impact be on financial markets, currencies, trade arrangements and the global economy," analyst Ken Herbert wrote in a note.

However, Herbert doesn't expect the vote to push the United States or other major economies into a recession, but said, "We will be very focused on the impact on passenger travel, which has been one of the key pillars of strength for the commercial aerospace cycle."

Related Link: How The U.K.'s Exit From The EU Might Affect Aerospace, Defense Stocks

The analyst noted that for the commercial aerospace cycle, the U.K. and Europe represent relatively smaller markets in terms of aircraft orders and deliveries, especially as the growth has been concentrated largely in emerging markets. Europe accounts for about 26 percent of total air traffic, with the U.K. accounting for less than 5 percent.

A Few Names

In the Canaccord coverage universe, firms with most direct revenues from Europe include Hexcel Corporation HXL, at 37 percent, followed by TransDigm Group Incorporated TDG, at 32 percent, and then at about 23–24 percent are B/E Aerospace Inc BEAV, Crane Co. CR and Esterline Technologies Corporation ESL.

Herbert said the currency exchange rates would be a key headwind, as all aircraft are sold in US dollar.

"[T]he risk is significant for Boeing Co BA as Airbus can enjoy a cost advantage assuming the Euro weakens as a result of this vote," Herbert highlighted.

Hexcel also would benefit due to its higher euro- and U.K.-dominated cost structure.

"Note HXL benefits by an estimated $0.02 in EPS for each 5 percent FX move," the analyst elaborated.

Looking Globally

For global defense markets, the analyst does not expect the vote to materially change the global security outlook. However, there are issues regarding NATO and the ISIS conflict that will be impacted by the vote.

Herbert said the stocks with the most defense exposure in Canaccord's coverage are Cubic Corporation CUB, Ducommun Incorporated DCO, Rockwell Collins, Inc. COL and Esterline.

"Within our universe, for defense exposure we favor CUB and COL, and for commercial AM exposure we favor TDG, HEI and BEAV," Herbert concluded.