It's no secret that the recovery in the aerospace market took a step back over the summer, but that doesn't mean that there aren't pockets of relative strength. One such area is the business jet market, and Honeywell's (NYSE: HON) latest Global Business Aviation Outlook helps to highlight the case that the stock is the best way to gain exposure to aerospace. Here's why.
The Global Business Aviation Outlook
The company states that its outlook is created using a combination of macroeconomic analyses, discussions with industry leaders, and, most importantly, "original equipment manufacturers' production and development plans shared with the company."
The key takeaways from the outlook imply that the business jet and general aviation market is in a lot better shape than mainstream commercial aviation.
Honeywell's avionics and auxiliary power units are widely used on business jets. Image source: Getty Images.
Business jet usage
First, business jet usage is expected to be at 80%-85% of 2019 levels in the fourth quarter of 2020 and will be at 2019 levels by the summer of 2021. Contrast this with the International Air Transport Association expectation that commercial air traffic will be down 66% in 2020 compared to 2019, and a full recovery to 2019 levels won't occur until 2024.
In short, the business jet market is recovering much more quickly than the commercial aviation market in general, and the recession is far less deep in business aviation.
Business jet deliveries
Second, up to 7,300 business jet deliveries are expected to be made in 2021-2030, a figure down just 4% from the comparable forecast made last year. This compares favorably with Boeing's recent market outlook, which calls for demand for 18,350 commercial airplanes over the next decade, a reduction of 11% versus its comparable forecast last year.
In other words, business aviation spending plans remain largely on track, but it will be a few years before commercial aviation recovers. Moreover, 80% of business jet operators surveyed by Honeywell said their plans had not been affected by COVID-19.
Forecast growth rates
Third, the forecast to 2030 assumes a 4%-5% annual growth rate of deliveries, a figure slighter higher than last year's estimate due to the assumption of a sharp recovery from the significant contraction in 2020.
It's difficult to compare this figure with Boeing's recent forecast because the commercial aviation market is going to decline considerably more than business aviation will in 2020, making growth comparisons difficult. That said, Honeywell's forecast looks reasonable, and Boeing's forecast for commercial passenger air traffic to grow by an annual rate of 3.7% from 2019-2029 seems to be implying a high-single-digit growth rate from 2025-2029 given expectation for a recovery to 2019 levels by 2024.
Honeywell's business jet exposure
All of which leads investors to start to look at Honeywell as the best placed of the three aviation supply giants (GE and Raytheon Technologies are the others) in the current environment.
Honeywell's aerospace segment was responsible for 39% of total company sales and 45% of segment profit in 2019, so it obviously has heavy exposure to aerospace. However, breaking out the company's revenue by business activity reveals that its commercial aviation (which includes business and regional jets) activity only accounted for 24% of revenue in 2019.
Examining the data closer shows that business and general aviation accounted for around a third of overall commercial aviation revenue. In a nutshell, business and general aviation made up around 8% of total company revenue compared to rest of Honeywell's commercial aviation revenue at 16%.
Data source: Honeywell presentations.
All told, business aviation matters to Honeywell, and when coupled with defense and space revenue, it's clear that around 60% of Honeywell's aerospace revenue comes from relatively safe areas.
Furthermore, many of Honeywell's solutions for the business jet market are in areas of secular growth, like its JetWave inflight Wi-Fi and flight planning and communications solution GoDirect. These are both products that can grow by being sold into the existing fleet of aircraft.
In addition, other parts of Honeywell's overall portfolio have good prospects, too. For example, its safety and productivity solutions (SPS) segment looks primed for growth, led by its warehouse automation business, Intelligrated.
Meanwhile, an improvement in automotive production and light vehicle traffic will help its performance materials and technologies (PMT) segment via increased demand for refrigerants in vehicles and refining catalysts and absorbents (fuels). And finally, management believes it has a future growth opportunity in its Honeywell Building Technologies (HBT) business via an increased customer awareness around the need to keep buildings safe and clean.
A stock to buy
Honeywell's business aviation outlook is encouraging and should help allay investors' fears over the risk in its aerospace segment. As such, the company is probably the safest way to invest in the aerospace sector right now. Meanwhile, the other parts of Honeywell's portfolio should start to improve in step with an economic recovery. The stock remains attractive for investors.
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