航空航天与国防：全球航空航天与国防行业入门指南

Aerospace & Defense: A primer on Global A&D We publish an industry primer on Global Aerospace & Defense to help navigate the currentunstable environment, diving into the fundamental drivers of the businesses and stocks. Adrien Rabier+44 20 7676 6820adrien.rabier@bernsteinsg.com Aerospace & defense is an inherently global sector, with global market drivers. Douglas S. Harned, Ph.D.+1 917 344 8430douglas.harned@bernsteinsg.com Commercial aerospace is driven by two major global OEMs (Airbus and Boeing), competingagainst each other in the global market. The key suppliers are also global, and the key driverfor the industry is global air travel demand. For defense, the US is the biggest market, butinvesting requires a consideration of global geopolitical threats. Cyriaque Blanchet+44 20 7676 7342cyriaque.blanchet@bernsteinsg.com Commercial aerospace is a cyclical industry, driven by GDP growth and airlineprofitability.Both aircraft and engine manufacturers enjoy strong competitive positionswith high barriers to entry. For the aircraft OEMs, deliveries are the key driver of cashflow. The two OEMs have full backlogs, giving them close to a decade of visibility. Inthe current environment, demand is so strong that supply has become the sole driverof stock performance. Drivers of aircraft deliveries include 1) the need for the industryto increase total fleet size as passenger traffic grows, and 2) replacement demand ofold aircraft. Historically, traffic growth moves with global GDP growth, but is at higherbeta. For replacement demand, the main driver is the existence of new airplane modelsand the age distribution of the installed base. For many of the suppliers, especially theengine manufacturers (GE, Safran, RTX, Rolls-Royce, MTU), profit is primarily made in theaftermarket, and the aftermarket is driven by the installed base. The current shortage ofnew planes has created a very supportive cycle for the aftermarket players, allowing theengine manufacturers to capture most of the value in the supply chain. Over the long run,the aerospace industry will need to focus on sustainability, but none of the solutions will beeasy. Jennifer Ma+1 917 344 8408jennifer.ma@bernsteinsg.com Specialist Sales James Brady+44 20 7762 5272james.brady@bernsteinsg.com Steve Song+1 917 344 8401steve.song@bernsteinsg.com Defense contractors work with department of defense customers, whose budgetsare driven by geopolitical threats.The size and funding priorities are determinedprimarily by the level and nature of global security threats, not the macroeconomy, althoughbudget requirements need to fit within the overall fiscal policies of the government. Capexis naturally lower and cash flow is strong for defense companies, given governmentfunding. Defense companies tend to enjoy protection from inflation too. In awardingcontracts, particularly in the US, development work is first typically done on a cost-plusbasis, and margins tend to be low. Eventually, the program moves into the productionphase, where margins (and risks) are higher. Margins for global defense players is usuallyin the low-teens. The dependency on a limited number of customers (governments), theinvolvement of governments in the shareholder base, and the public funding tend to limitprofitability for defense companies. To analyze defense stocks, it is helpful to understandwhat geographical and domain exposure they have, given the wide discrepancy in thegrowth rate of the different defense countries and domains. That has been particularlyvisible in Europe, as the companies with the highest exposure to short-cycle products(ammunition, artillery, ground vehicles...) have significantly outgrown their peers. But,ahead of the second stage of the re-arming phase, companies with the highest exposureto the most demand products (air defense systems, missiles, combat aircraft...) shouldoutperform. BERNSTEIN TICKER TABLE INVESTMENT IMPLICATIONS We rate Airbus, Leonardo, StandardAero, MTU, Rheinmetall, L3Harris, Howmet, Safran, GE Aerospace, Thales and Boeing asOutperform. We rate BAE Systems, Dassault Aviation, HII, TKMS, Rolls-Royce, Lockheed Martin, General Dynamics, NorthropGrumman, RTX, Spirit Aerosystems and Textron as Market-Perform. DETAILS Aerospace and defense are two sub-sectors with very different drivers. There is a natural product linkage, as many aerospacemanufacturers and suppliers that make aircraft for civilian use are involved in defense work as well. But in terms of businessdrivers, and ultimately stock drivers, they are two very different sub-sectors. •Commercial aerospaceis a cyclical industry driven by GDP and airline profitability. The delivery of new airplanes to airlinesis the most visible stream of revenue, but the aftermarket is also significant, as the airplanes need maintenance work overtheir life. The sector was hit very hard by the COVID pandemic. Since then, demand recovery has been strong, but ongoingsupply chain challenges have limited the pa