Gabelli's Bancroft: Aerospace, Defense ETFs May Soar

Despite recent challenges, the commercial aerospace sector is poised for long-term growth. 

The International Air Transport Association expects a gradual recovery in air travel, with passenger traffic projected to grow at a compound average growth rate, or CAGR, of 4% until 2041. The expected resurgence will drive demand for repair, overhaul services and replacement parts. 

China plays a pivotal role in commercial aviation growth, accounting for a significant share of global deliveries. Boeing Co.’s projection of 42,595 new airplanes over the next two decades reflects the industry's optimism. Narrow-body aircraft, such as the Boeing 737 MAX and Airbus A320neo, will dominate this demand. 

In summary, strong fundamentals, global economic growth and the reemergence of air travel are key factors supporting the industry's growth. 

Defense Sector 

The U.S. defense budget witnessed substantial growth in 2023, increasing by 12.5% to $852 billion. Over the past five years, it maintained a 4.9% CAGR, with expectations of continued modest growth. Programs like the JSF, B-21, THAAD, GBSD and GMD are driving opportunities across the defense sector. 

With the Russia-Ukraine conflict, members of the North Atlantice Treaty Organization are increasing defense spending, potentially injecting an additional $82 billion into the industry. China and Russia have also intensified their defense investments, altering the global defense spending landscape. 

Aerospace and Defense Companies 

Some companies we will continue to follow in 2024 include: 

AAR Corp.: Focuses on original equipment manufacturing, or OEM, production tailwinds, a recent Trax acquisition and margin expansion. 

Bridger Aerospace Group Holdings Inc.: Addresses the growing wildfire challenge, highlighting the importance of aerial surveillance and its unique market position. 

Crane Co.: Emphasizes demand strength in commercial aerospace and continued growth in the defense sector. Post-spin, investor interest has surged. 

Ducommun Inc.: Positions itself in next-generation programs, particularly in missile defense, radar systems and electronic warfare. Recent acquisition and restructuring efforts bode well for the company. 

Elbit Systems Ltd.: Engages in defense, homeland security and commercial programs globally, spanning aerospace, land and naval systems, and advanced technologies. 

Conclusion 

The aerospace and defense industry is marked by promising growth prospects. Commercial aerospace is set to rebound, driven by increased air travel and robust demand for new aircraft. The defense sector benefits from a growing budget, geopolitical factors and innovative programs. The industry's resilience, combined with the strategies of key players, positions it for a dynamic and prosperous future. 

Tony Bancroft is portfolio manager of the Gabelli Commercial Aerospace and Defense ETF (GCAD).