US Aerospace & Defense_2025 Outlook_ Favor OE_AM barbell as BA ramps, not expecting DoD cuts but remain selective

Summary of US Aerospace & Defense 2025 Outlook Industry Overview - The report focuses on the US Aerospace & Defense (A&D) industry, highlighting key debates and investment opportunities for 2025, particularly in Original Equipment (OE) and Aftermarket (AM) segments [2][7]. Core Insights 1. Investment Strategy: A barbell approach is recommended, favoring both OE and AM to capture improving production rates while hedging supply chain risks [2][7]. 2. Boeing (BA) Production: Boeing's MAX production is projected to reach 38 units per month by October 2025, with expectations for the stock to outperform as normalized earnings and free cash flow (FCF) potential are recognized [2][6]. 3. Business Jet Market: 2025 is anticipated to be the peak year for business jet deliveries, with deliveries expected to exceed orders, leading to a reduction in backlog [2][6]. 4. Department of Defense (DoD) Budget: No significant cuts to the DoD investment budget are expected, although uncertainties regarding federal cuts and specific contracts may impact valuations [2][6]. 5. Government IT Spending: Non-defense spending is at greater risk, particularly affecting Government IT (GovIT) sectors, which have seen an overreaction in stock sell-offs [2][6]. Key Debates for 2025 1. OE vs. AM Performance: There is an expectation for OE to outperform AM, driven by Boeing's recovery and supplier earnings inflection, despite potential supply chain disruptions [8][14]. 2. Boeing's Recovery Year: 2025 is viewed as a pivotal year for Boeing, with improvements in quality and supply chain stability expected to lead to positive FCF in the second half of the year [8][14]. 3. Peak Business Jet Deliveries: The industry is expected to face oversupply in 2025, with higher deliveries leading to increased used aircraft inventory [8][14]. 4. DoD Investment Growth: National security remains a bipartisan priority, with projected growth in the DoD budget, although targeted cuts may occur [8][14]. 5. DOGE Concerns: Concerns regarding the DOGE administration's impact on federal spending are seen as overblown, but challenges for GovIT are anticipated [8][14]. Investment Recommendations - Buy Recommendations: - Boeing (BA): Anticipated recovery with a large backlog and improved production management [11]. - Woodward (WWD): Expected growth in next-gen engines and aftermarket services [11]. - General Electric (GE): Strong growth potential in aftermarket services and engine deliveries [11]. - Northrop Grumman (NOC): Strong defense pick with exposure to high-priority DoD programs [11]. - CACI: Favorable exposure to DoD and intelligence sectors, with potential for re-rating as budget visibility improves [11]. - Sell Recommendations: - Bombardier (BBD.B) and Textron (TXT): Expected underperformance due to oversupply and market conditions [11]. Additional Insights - The report emphasizes the importance of normalized earnings and FCF in driving stock performance, particularly for Boeing, which is expected to trade at a 17X mid-cycle multiple as it begins to generate cash [6][11]. - The aftermarket segment is projected to grow steadily, with pricing power and margin expansion anticipated, particularly for engine-exposed companies [15][33]. - The average age of the commercial fleet is increasing, which is expected to support aftermarket demand [26][29]. This comprehensive analysis provides a detailed outlook on the US Aerospace & Defense industry for 2025, highlighting key trends, investment strategies, and potential risks.