Héroux-Devtek (TSX:HRX) specializes in the design, development, manufacture and repair of fracture critical components for the aerospace market. The company is the third-largest landing gear manufacturer in the world, supplying both the commercial and defence sectors.
In the commercial sector, the company is active in the large commercial and business jet, regional aircraft and helicopter markets. On the defence side, the company provides systems, parts and services for defence aircraft in both the United States and in Europe. As such, a significant portion of the company’s sales are made to a limited number of customers located in Europe, the U.S. and Canada.
Diverse business segments The company’s aerospace segment is divided into the commercial aircraft market, the defence aircraft market and the business aircraft market. Commercial aircrafts are primarily sold to airlines and defence aircrafts are mainly sold to governments. Business aircrafts are generally sold directly to consumers or to fleet operators. Hence, the demand for aircraft varies according to different factors. Commercial and business aircraft demand can be forecast based on passenger travel, whereas defence aircraft demand is driven by geopolitical climate and defence budgets.
Impact of COVID-19 pandemic The COVID-19 pandemic has had a huge impact on the company and the aerospace industry, particularly for commercial air travel. Flight traffic is down 80% due to global lockdowns and the company has been impacted due to travel bans. This has resulted in delayed deliveries and canceling orders of new commercial aircraft.
Worldwide, supply chains are also disrupted by varying degrees of government imposed lockdowns as well as the direct impact on manufacturing facilities of virus outbreaks. Despite these uncertainties, Héroux-Devtek has responded well by reducing costs and developing newer lines of business.
Aftermarket service potential The company expects a significant decrease in the demand for aftermarket services, due to the high percentage of grounded fleet. While it’s still rather early to determine the speed and extent of the full recovery, most industry analysts expect to see air travel start resuming gradually in some Asian markets by the end of 2021. This should serve as a big profit boost to Héroux-Devtek.
Lucrative air cargo business Héroux-Devtek serves the air cargo market and has benefitted from a surge in the transportation of medical and pharmaceutical supplies. The air cargo market is expected to continue to face a somewhat challenging business environment with significant regional performance differences driven by the timing at which economies re-open.
Optimistic future outlook In 2020, global defence expenditures reached over $1.9 trillion marking the single largest year-over-year increase in over a decade. Fighter jets, which account for a key portion of the company’s defence sales, is expected to grow the fastest in 2022.
The business aircraft market demand, which Héroux-Devtek serves, is more volatile than commercial and defence aircraft market. Since the beginning of the COVID-19 pandemic, global business aviation has been less impacted than the commercial aircraft market.
While non-essential traveling might be significantly reduced over the next few years, an increase in demand from anxious flyers willing to avoid crowded airports is expected. This should be a big benefit to Héroux-Devtek.
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Fool contributor Nikhil Kumar has no position in any of the stocks mentioned.
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