It was the worst of times. It was the worst of times. No, I am not misquoting Dickens here. Instead, I am talking about the state of the aviation industry after the COVID-19 pandemic dropped a bomb in March. The sector has crashed and burned like few others during the last quarter.
The country’s largest airline operator Air Canada doesn’t expect demand to return to 2019 levels for three years at least. Other airlines in the country put the timeline at five years.
While airline stocks will take years to stage a turnaround, you can consider one aviation company for massive gains in the next year.
Why am I bullish on this Quebec-based aviation stock
Heroux-Devtek (TSX:HRX) is a Quebec-based company in the aerospace sector and is the world’s third-largest manufacturer and supplier of landing gear solutions across the world. The company is engaged in the design, development, manufacture, repair, and overhaul of landing gear, actuation systems, and components through facilities in North America and Europe.
The stock was trading at $21.64 in February before it fell to sub-$10 levels in May — a drop of almost 60%. The stock has recovered somewhat and is now at $10.18. Why am I recommending this stock as a buy if commercial airlines are not predicting a great future? Heroux has a solid pipeline of defence orders that should see it through the worst of the pandemic.
Heroux has a backlog of $810 million, according to its latest reported numbers for the fourth quarter and fiscal year ended March 31, 2020. Two-thirds of this order comes from the defence sector. Commercial sales in the fourth quarter were down 7.8% to $72 million from $78 million in 2019, while defense sales were up 18.7% from $79.9 million to $94.8 million. For the full year, defense sales were up 33% from $247.6 million in 2019 to $329.3 million.
The company’s financials are good with $193 million available in liquidity and no major debt repayments until the end of 2024, giving its commercial customers plenty of time to recover from the impact of the pandemic.
Heroux recorded an operating loss of $30.1 million for the fiscal year 2020. This was due to $79.7 million getting written off in non-cash goodwill because of the expected demand reduction from the commercial sector for the year.
What next for investors
Airbus and Boeing have announced production rate cuts totaling approximately 40% of their large commercial aircraft volume. Heroux, in turn, announced a restructuring of its costs and manufacturing facilities that led to the closing of the Alta Precision business unit and a layoff of 10% of the company’s workforce.
Heroux has also withdrawn its sales guidance for the current fiscal year due to the uncertainty of the aerospace industry because of the pandemic and consequently, its business. Further, it expects a significant decrease in “the demand for aftermarket (lower ASMs, de-stocking, deferred maintenance/upgrades) due to the high percentage of grounded fleet — estimated at 80% at the peak of the pandemic.”
Analysts have given this stock a target of $14.47, a little over 44% from the current price. While the hit from the commercial space will be hard, the defence orders should ensure that the company gets through fiscal 2021 with no major worries. Any positive news on the aviation front will only ensure that the stock goes up further.