Its not a question of where the "resistance" will be in CADE's stock price, its a question of revenue increases in the sector ... and those look to be impressive ...
From the Napeague web site ...
Monday, July 5, 1999
Aerospace & Defense Industry
The Aerospace and Defense Industry has been hard hit by the reduction in the U.S. and Western European defense budgets over the last decade. However, it now appears likely that the defense budget reductions have "bottomed out", with increases in spending planned for coming years. The successes and failures of the recent NATO action on Kosovo have shown the need to enhance the abilities and mobility of our armed forces, and I expect that there will be a shift toward allocating more resources to this effort.
In the wake of the defense budget reductions, the Industry has largely transitioned to serving the civilian market. Concurrently, as a result of the growth in air travel and the volume of air cargo in recent years, demand for aircraft, avionics, and aircraft engines and engine parts has been increasing, and is expected to continue to increase into the foreseeable future. Although the Industry's revenue growth has averaged around 9% annually for the last five years, it's growth rate has almost doubled over the last year.
During the summer of 1998, a number of the secondary issues in this segment were hit by abrupt price declines (as were almost all other stocks...). However, even though their earnings continued to be quite strong, they did not stage the recoveries during the fall that were achieved by other segments.
At the current time, the "blue chips" in this segment are generally overvalued, especially in the face of the profit problems that many of them have experienced over the last year. However, a number of the secondary issues are significantly undervalued, although technical analysis seems to signal a possible turnaround in the near future.
The 10-K Report filed recently by the Triumph Group, Inc. (NYSE:TGI) contains a very comprehensive overview of this industry segment:
INDUSTRY OVERVIEW AND TRENDS
Both the aircraft component production and component repair industries are highly fragmented, each consisting of a limited number of well-capitalized companies, which offer a broad range of products and services, and a large number of smaller, specialized companies. The aviation industry has been consolidating at an increasing pace in recent years, and it is expected that this consolidation will continue for the foreseeable future.
A number of significant trends are currently affecting the market for the design, engineering, manufacture, repair and overhaul of aircraft components. These trends include the following:
INCREASES IN AIR TRANSIT AND AIRCRAFT PRODUCTION. According to Boeing's 1998 Current Market Outlook, the worldwide fleet of commercial airplanes may double from approximately 12,300 airplanes at the end of 1997 to approximately 26,200 airplanes by 2017. Further, the Boeing Report projects that cargo jet aircraft will increase from approximately 1,430 airplanes in 1997 to approximately 2,706 airplanes by 2017. Additionally, the number of airplanes in service for more than ten years will continue to increase, and these older airplanes are the primary market for independent providers of manufacture, repair and overhaul services. The continued growth in air transit and aircraft production will increase the demand for aircraft component purchases and repairs.
INCREASED OUTSOURCING BY AIRCRAFT OPERATORS AND OEMS. Aircraft operators have come under increasing pressure to reduce both operating and capital costs associated with providing aviation services. While several of the expenditures incurred by aircraft operators are beyond their direct control, such as fuel prices and labor costs, aircraft operators seeking cost reductions have increased purchases of some components from third parties and have outsourced repair and overhaul functions. Aircraft components sold by third party suppliers and aircraft components that have been repaired and overhauled are generally less expensive than new aircraft components sold by OEMs. In addition, OEMs are increasingly becoming "assemblers" of aviation products by outsourcing more manufacturing and repair functions to third parties.
In addition, as consolidation in the aviation services industry continues, aviation services consumers are requiring vendors to offer a broader range of services including, in some instances,
inventory maintenance and management services.
REDUCTION IN THE NUMBER OF APPROVED SUPPLIERS AND VENDORS. In order to reduce purchasing costs, streamline purchasing decisions and have greater control over quality, purchasing departments of OEMs and aircraft operators have been reducing the number of approved suppliers and vendors. In the past several years, several OEMs and aircraft operators have reduced their supplier and vendor lists from as many as 50 to a core group of five to ten "mega-suppliers" or "mega-vendors" who have the size and capacity to meet their needs.
INCREASED MAINTENANCE AND SAFETY REQUIREMENTS. Under regulations promulgated by the FAA and similar agencies in other countries, including the Joint Aviation Authority and the Civil Aviation Administration of China, as well as guidelines established by OEMs and aircraft operators, when an aircraft component fails to perform within prescribed limits or after logging a prescribed number of flight hours, the aircraft component must be brought to a repair facility certified by the FAA or similar agency of a foreign nation for various types of designated service or replacement. The FAA has changed the nature of the licenses that it grants, from the grant of broad licenses for
aircraft accessories or instruments within broad classifications to more limited licenses covering specific parts within more narrow classifications. In addition, aircraft components require regular
maintenance and inspection and replacement of "life-limited" components. The trend toward more stringent maintenance requirements and more frequent maintenance and overhaul has increased the size of the market for the repair of these components, because the use of new components is not always cost effective.
INCREASED EMPHASIS ON COMPONENT TRACEABILITY. Because of concerns regarding the use of unapproved aircraft spare parts, regulatory authorities have increased the level of documentation that must be maintained on spare parts. This requirement has been extended by OEMs and aircraft operators to the vendors of spare parts. The high cost of required technology to compete effectively in the redistribution market has made entry into and survival in the aircraft spare parts redistribution market increasingly difficult and expensive.
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