Morgan Stanley Remains Positive On Aerospace & Defense Stocks Going Into 2023

  • Morgan Stanley analyst Kristine T Liwag remains bullish on the continued aerospace recovery in 2023.
  • Global air traffic at present is at about 75% of pre-COVID-19 levels as of October 2022, said the analyst.
  • Full normalization is likely in 2023 as China re-opens. The analyst said corporate travel budgets are expected to be at 98% of 2019 levels.
  • The analyst cited the bear thesis prevalent since 2020 that "travel normalization is out of reach after COVID-19" has debunked by strong recovery of global air traffic as border restrictions eased.
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  • Liwag added that the duopolistic nature of Aerospace and shortage of aircraft assets (supply chain constraints and limited availability of aircraft slots through 2027) makes Aerospace defensive in a period of macroeconomic risks.
  • After the worst exogenous shock in the Aerospace industry, some companies emerge stronger and more profitable like TransDigm Group Incorporated TDG, while some continue to struggle operationally like Spirit AeroSystems Holdings Inc SPR.
  • The analyst's top Aerospace stock pick remains Howmet Aerospace Inc HWM.
  • Liwag views Raytheon Technologies Corp RTX as a value play and expect Boeing Co BA to remain a key debate for Bulls and Bears.
  • Key watch items for industry recovery in 2023 are the supply chain, geopolitics, China re-opening, and the macroeconomic environment, said the analyst.
  • As 2023 begins, the analyst sees the defense industry in the early innings of an upcycle driven by rising geopolitical tensions and the U.S. Defense Department's generational pivot away from decades of focus on counterterrorism/counterinsurgency toward overdue preparation for near-peer competition.
  • The analyst added that Russia's conflict with Ukraine had provided an irreversible wakeup call around the need to sufficiently resource defense modernization efforts, jolting the U.S. and its allies into elevated spending plans.
  • Defense companies, in the analyst's view, have sufficiently tempered investor expectations heading into 2023, potentially positioning for 'beat-and-raise' scenarios moving through the year.
  • Also SeeWar Winners: Why The Defense Contracting Business Is Thriving
  • Key catalysts include the final FY23 spending bill and an FY24 budget proposal, Liwag said.
  • The analyst will also be watching out for additional U.S. aid packages to Ukraine, which are now amounting to significant spend, and FY24 budget mark-ups deeper into 2023.
  •  In Defense, the analyst expects 2023 will continue to be driven by geopolitical risk perceptions as the most significant growth from recent higher defense spending commitments does not begin to materialize until the 2024-2025 timeframe.
  • Price Action: HWM shares traded lower by 0.69% at $39.12 on the last check Friday.
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