Lots of Passengers, Empty Cockpits: How to Play the Pilot Shortage
My newsletter’s topic today reminds me of a scene in the movie spoof Airplane! (1980). Speaking over the intercom, a flight attendant reassures passengers about a patch of turbulence and then she calmly asks: “By the way, is there anyone on board who knows how to fly a plane?”
Panic ensues, of course. In the real world, something akin to panic is gripping aviation operators of all types, as the need for trained pilots grows acute.
Below, I pinpoint the best investment play on the global pilot shortage (and you’ve probably never heard of the company). But first, let’s examine the magnitude of the shortage and how it emerged.
The Current Market Outlook report released this week by aerospace giant Boeing (NYSE: BA) projects that the aviation industry must generate more than 2.1 million new pilots and other skilled workers during the next 20 years to keep pace with the sector’s huge growth. That spells trouble for airlines and government agencies that already don’t have enough pilots.
Passenger airlines are particularly vulnerable. The major carriers are bracing for the retirement of about 18,000 pilots in the U.S. over the next three years. The pilot shortage could drive some regional airlines out of business.
The airline sector is enjoying good times, based on fundamentals and not wishful thinking among investors. Paradoxically, the boom in aviation has a downside, by creating passenger demand that the existing inventory of pilots can’t fulfill.
Jim Pearce, chief investment strategist of Personal Finance, explains his skepticism over the excessive optimism that’s been driving the broader indices to new highs:
“As someone who reports on the stock market for a living, I spend a lot of time studying a wide range of empirical data to determine fair value for investments.
I stick to numbers to avoid getting swept up in the euphoria driving a hot stock to unimaginable heights, especially when the company in question is unprofitable and may never achieve the outsized expectations justifying its huge share price.”
Boeing, the company that released this week’s report about the pilot shortage, has been the star of the Dow Jones Industrial Average, and justifiably so. BA shares rose a whopping 9.88% on Wednesday to close at its highest level ever, after a stellar second-quarter earnings report. The aerospace behemoth reported earnings per share of $2.89, blowing away the consensus estimate of $2.58. Management also raised earnings guidance for 2017. The average analyst expectation is that BA’s year-over-year earnings growth will reach 29.7% this year, 10% next year, and 17.7% over the next five years on an annualized basis.
BA shares are up about 50% year to date, compared with gains of about 10% for the Dow, of which it is a component, and around 11% for the S&P 500. I’ve frequently recommended Boeing in this newsletter, most recently in the July 24 issue. Boeing is an industry bellwether that’s indicative of aviation’s resurgence, but to learn the identity of the stock that benefits from the pilot shortage, read on.
Take me to the pilot…
I can personally attest to the expensive, time-consuming and complex rigors of flight training. That’s me pictured to your left, back when I was undergoing training as a helicopter pilot with the Bell Helicopter Training Academy in Fort Worth, Texas. Bell Helicopter is a subsidiary of the diversified conglomerate Textron (NYSE: TXT).
Even if they have a passion to fly, many students drop out of flight school because they find it too demanding. As increasing numbers of pilots retire, the shortage worsens.
What’s more, fast-moving change continues to unfold in the field of cockpit electronics, putting intense pressure on aircraft operators to modernize their equipment and keep pilot skills up-to-date.
The aerospace upswing that’s been lifting Boeing could be undermined by the worsening shortage of pilots. But as the old saying goes, in crisis there’s opportunity.
A pure play on the pilot shortage is CAE (NYSE: CAE). This company is little covered by the financial press, but without its services, aircraft in the civilian and military sectors would be stuck on the ground. As such, CAE’s fortunes are tied to those of aircraft manufacturers and operators.
So far in 2017, Delta Air Lines (NYSE: DAL) has hired the greatest number of new pilots (474) among the major U.S. carriers, followed by Southwest Airlines (NYSE: LUV) at 366, American Airlines Group (NYSE: AAL) at 354, and United Airlines (NYSE: UAL) at 254.
With a market cap of $5.7 billion, CAE is a leader in aviation training. Canada-based CAE designs, manufactures, and markets training simulation equipment around the world. The company operates through three divisions: Civil Aviation Training Solutions, Defense and Security, and Health Care.
Civil Aviation provides training solutions for flight, cabin, maintenance, and ground personnel in commercial, business, and helicopter aviation; flight simulation training devices; and crew sourcing services. Defense and Security operates as a training systems integrator for air, land and naval defense forces, including government agencies responsible for public safety. The Health Care segment provides training devices for medical students and health care providers.
The latest employment survey from FAPA.aero, a financial advisory service for professional pilots, shows that 2,426 new pilots were hired during the first half of 2017 by the major U.S. carriers, with a total of 5,800 new pilots on track for getting hired this year. FAPA.aero reports that the year-end figure would represent the most new pilots hired since the group started tracking data in 1990.
Year to date, CAE shares are up nearly 23%, as the company rides the tailwinds of the aerospace/defense industry boom and experiences a steady stream of pilot cadets. Further upside in CAE stock is likely.
The average analyst expectation is that CAE’s year-over-year earnings growth will reach 11.8% next quarter, 4.9% in the current year, and 11.6% next year. My own calculations show that the company’s five-year earnings growth on an annualized basis should come in at about 10%. The stock’s trailing 12-month price-to-earnings ratio (P/E) hovers at 23, only a slight premium to the industry average of 20.8.
As a mid-cap stock, CAE enjoys outsized room for future growth. CAE also is further proof that beneficial technology doesn’t just emanate from Silicon Valley.
Got any feedback? Shoot me an email: firstname.lastname@example.org — John Persinos
Jim Fink explains his million-dollar secrets…
Jim Fink, chief investment strategist of Velocity Trader, left a high-paying corporate law gig because he realized he could make more money investing. By creating a proprietary system called the Velocity Profit Multiplier, he turned $50,000 into $5.3 million.
Jim recently explained to me how he consistently racks up big gains:
“After years of study and experimentation, I’ve discovered that every single stock sends out hidden signals before it moves, and my system tracks these signals to find profitable trade opportunities.
The good news is that I know these signals perfectly, and I can provide you with these buy signals myself. So when you’re first starting out, you don’t have to do all the work… I’ll do the work for you.
But I’m also a big believer in education, and that over time you’ll be able to follow my lead and understand more about these trade indicators.”
Editors Note: Jim Fink recorded a presentation that explains the secrets behind his investing technique. This presentation is must-viewing for any serious investor. Click here to watch it now.